UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One) | |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
For the fiscal year ended | |
OR | |
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
(Exact Name of Registrant as Specified in Its Charter)
|
|
|
|
(
Registrant’s Telephone Number, Including Area Code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻
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.
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).
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:
| Accelerated filer ◻ | |
Non-accelerated filer ◻ | Smaller reporting company | |
Emerging growth company |
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the closing price on June 30, 2019, as reported by the Nasdaq Global Select Market was approximately $
The number of shares outstanding of the issuer’s common stock, par value $0.01 per share, as of February 19, 2020, was
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the registrant’s 2020 annual meeting of shareholders scheduled to be held on June 26, 2020, are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
2
PART I
ITEM 1. BUSINESS
Overview
United Therapeutics Corporation focuses on the strength of a balanced, value-creating biotechnology model. We are confident in our future thanks to our fundamental attributes, namely our obsession with quality and innovation, the power of our brands, our entrepreneurial culture and our bioinformatics leadership. We also believe that our determination to be responsible citizens — having a positive impact on patients, the environment and society — will sustain our success in the long term.
Through our wholly-owned subsidiary, Lung Biotechnology PBC, we are focused on addressing the acute national shortage of transplantable lungs and other organs with a variety of technologies that either delay the need for such organs or expand the supply. Lung Biotechnology is the first public benefit corporation subsidiary of a public biotechnology or pharmaceutical company.
We market and sell four commercial therapies in the United States to treat pulmonary arterial hypertension (PAH): Remodulin® (treprostinil) Injection (Remodulin); Tyvaso® (treprostinil) Inhalation Solution (Tyvaso); Orenitram® (treprostinil) Extended-Release Tablets (Orenitram); and Adcirca® (tadalafil) Tablets (Adcirca). We also market and sell an oncology product in the United States, Unituxin® (dinutuximab) Injection (Unituxin), which is approved for the treatment of high-risk neuroblastoma. We also generate revenues from the sale of Remodulin, Tyvaso and Unituxin outside the United States.
We are actively advancing a pipeline of research and development projects that includes new indications, formulations and delivery devices for our existing products, as well as new products to treat PAH, cancer and other conditions.
United Therapeutics was incorporated in Delaware in June 1996. Our principal executive offices are located at 1040 Spring Street, Silver Spring, Maryland 20910 and at 55 T.W. Alexander Drive, Research Triangle Park, North Carolina 27709.
Unless the context requires otherwise or unless otherwise noted, all references in this Annual Report on Form 10-K (this Report) to “United Therapeutics” and to the “company”, “we”, “us” or “our” are to United Therapeutics Corporation and its subsidiaries.
3
Our Commercial Products
Our commercial product portfolio consists of the following:
Product |
| Mode of Delivery |
| Indication |
| Current Status |
| Our Territory |
Remodulin | Continuous subcutaneous | PAH | Commercial in the U.S., most of Europe*, Argentina, Canada, Chile, Columbia, Israel, Japan, Mexico, Peru, South Korea and Venezuela | Worldwide | ||||
Remodulin | Continuous intravenous | PAH | Commercial in the U.S., most of Europe*, Argentina, Canada, Columbia, Israel, Japan, Mexico, Peru, Saudi Arabia and South Korea | Worldwide | ||||
Tyvaso | Inhaled | PAH | Commercial in the U.S., Argentina and Israel | Worldwide | ||||
Orenitram | Oral | PAH | Commercial in the U.S. | Worldwide | ||||
Unituxin | Intravenous | High-risk neuroblastoma | Commercial in the U.S. and Canada | Worldwide | ||||
Adcirca | Oral | PAH | Commercial in the U.S. | United States |
* Remodulin is marketed and sold in most of the major European markets other than the United Kingdom and Spain.
Products to Treat Pulmonary Arterial Hypertension
PAH is a life-threatening disease that affects the blood vessels in the lungs and is characterized by increased pressure in the pulmonary arteries, which are the blood vessels leading from the heart to the lungs. The elevated pressure in the pulmonary arteries strains the right side of the heart as it pumps blood to the lungs. This eventually leads to right heart failure and, ultimately, death. PAH is characterized by structural changes in blood vessel walls, aggregation of platelets and alteration of smooth muscle cell function. We believe that PAH affects about 500,000 individuals worldwide. We have seen increases in the number of people diagnosed with the disease, but due to the rarity of the disease and the complexity of diagnosing it, only a small fraction of patients with PAH are being treated.
4
Current therapies approved by the U.S. Food and Drug Administration (FDA) for PAH focus on three distinct molecular pathways: the prostacyclin pathway, the nitric oxide (NO) pathway, and the endothelin (ET) pathway. The classes of drugs that target these three pathways are:
| ● | Prostacyclin Analogues and IP Prostacyclin Receptor Agonists. Patients with PAH have been shown to have reduced levels of prostacyclin, a naturally occurring substance that relaxes the pulmonary blood vessels, prevents platelet aggregation and inhibits the proliferation of smooth muscle cells in the pulmonary vessels. Therefore, drugs that mimic the action of prostacyclin, known as prostacyclin analogues, are established PAH treatments. Another class of therapy, called IP prostacyclin receptor agonists, addresses PAH through the prostacyclin pathway. As compared with prostacyclin analogues, which broadly mimic the effect of prostacyclin, IP prostacyclin receptor agonists bind selectively to the IP receptor, one of several prostacyclin receptors. |
| ● | Phosphodiesterase Type 5 (PDE-5) Inhibitors and Guanylate Cyclase (sGC) Stimulators. Patients with PAH have also been shown to have reduced levels of the enzyme responsible for producing NO, a naturally occurring substance in the body that causes relaxation of the pulmonary blood vessels. NO produces this effect by increasing intracellular levels of cyclic guanosine monophosphate GMP (cyclic GMP). Therefore, another established therapeutic approach has been to inhibit the degradation of cyclic GMP using drugs known as PDE-5 inhibitors. In addition, sGC is an enzyme found in the endothelial cells and the receptor for NO. When NO binds to sGC, the enzyme enhances production of cyclic GMP. As a result, sGC stimulators are also approved to treat PAH. |
| ● | Endothelin Receptor Antagonists. PAH patients have also been shown to have elevated levels of endothelin-1, a naturally occurring substance in the body that causes constriction of, and structural changes to, the pulmonary blood vessels. Therefore, another established therapeutic approach has been to block the action of endothelin with drugs that are known as endothelin receptor antagonists (ETRAs). |
Because any or all of the three pathways may be therapeutic targets in a patient, these classes of drugs are used alone or in combination to treat patients with PAH. We currently market drugs in two of these classes. Remodulin, Tyvaso and Orenitram are all formulations of treprostinil, a prostacyclin analogue, and Adcirca is a PDE-5 inhibitor.
The clinical severity of PAH is classified according to a system originally developed for heart failure by the New York Heart Association and then modified by the World Health Organization (WHO) for patients with PAH, ranging from functional class I (no symptoms) through functional class IV (severe symptoms). Labeled indications for PAH therapies often note that clinical studies for the drug predominantly included patients in one or more functional classes.
PAH is a subset of the condition more broadly known as pulmonary hypertension. WHO has classified pulmonary hypertension into five groups, with PAH being designated WHO Group 1, which includes multiple etiologies such as idiopathic (meaning the cause is unknown) and heritable PAH, as well as PAH associated with connective tissue diseases. While our PAH therapies’ labeling is limited to the treatment of WHO Group 1 PAH, we are engaged in research and development efforts to expand the use of Tyvaso to treat pulmonary hypertension in certain categories of WHO Group 3. For further details, see Research and Development below.
5
Remodulin
Remodulin was approved by the FDA for subcutaneous and intravenous administration in 2002 and 2004, respectively, and has been sold commercially in the United States since 2002. We sell Remodulin to specialty pharmaceutical distributors in the United States and to pharmaceutical distributors internationally. We recognized $587.0 million, $599.0 million and $670.9 million in Remodulin net product sales, representing 40 percent, 37 percent and 39 percent of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively. Remodulin is indicated to treat patients with PAH, to diminish symptoms associated with exercise. Studies establishing effectiveness included patients with functional class II-IV (moderate to severe) symptoms. Outside of the United States, Remodulin is marketed and sold for the treatment of PAH throughout most of Europe, and various countries throughout Asia, the Middle East and South America, as noted in the table above.
We believe Remodulin has many qualities that make it an appealing alternative to competitive therapies. Remodulin is stable at room temperature, so it does not need to be cooled during infusion and patients do not need to use cooling packs or refrigeration to keep it stable. Treprostinil is highly soluble under certain circumstances and highly potent, which enables us to manufacture Remodulin in concentrated solutions. This allows therapeutic concentrations of Remodulin to be delivered at very low flow rates via miniaturized infusion pumps for both subcutaneous and intravenous infusion. Remodulin can be continuously infused for up to 48 hours before refilling the external infusion pump. This profile contrasts favorably with non-treprostinil based, continuously infused prostacyclin therapies on the market—Flolan®, Veletri® and generic epoprostenol.
Flolan and generic epoprostenol are not stable at room temperature (and therefore require refrigeration or the use of cooling packs), but Veletri may be stable at room temperature depending on its concentration. Flolan, generic epoprostenol, and Veletri have shorter half-lives than Remodulin, requiring mixing prior to pump refills. None of these competitive products may be administered via subcutaneous infusion, and therefore may only be delivered intravenously.
We also face competition from manufacturers of generic versions of Remodulin in the United States and abroad. See the section below entitled Patents and Other Proprietary Rights, Strategic Licenses and Market Exclusivity—Generic Competition.
Patients must use external pumps manufactured by third parties to deliver Remodulin. Smiths Medical, Inc. (Smiths Medical) manufactures the pumps used by most patients in the United States to administer Remodulin, including the CADD-MS® 3 (MS-3) pump used to deliver subcutaneous Remodulin, and the CADD-Legacy® pump to deliver intravenous Remodulin. In 2015, Smiths Medical notified us that it was planning to discontinue the manufacture of the MS-3 pumps and associated cartridges. We entered into an agreement with Smiths Medical to fund the manufacture of a further supply of MS-3 pumps and cartridges for use with branded Remodulin only. We anticipate this supply will be sufficient to ensure continued support of subcutaneous Remodulin for several years. As noted below under Research and Development, we are also developing a variety of next-generation delivery systems for Remodulin, including Trevyent, Remunity, the Implantable System for Remodulin and RemoLife. On February 24, 2020, we announced FDA clearance of the Remunity system, which we intend to launch by July 2020.
6
There are serious side effects associated with Remodulin. For example, when infused subcutaneously, Remodulin causes varying degrees of infusion site pain and reaction (redness and swelling) in most patients. Patients who cannot tolerate the infusion site pain related to the use of subcutaneous Remodulin may instead use intravenous Remodulin. Intravenous Remodulin is delivered continuously through a surgically implanted central venous catheter, similar to Flolan, Veletri and generic epoprostenol. Patients who receive therapy through implanted venous catheters have a risk of developing blood stream infections and a serious systemic infection known as sepsis. As a result, subcutaneous administration is the preferred method of Remodulin delivery, and is used by a majority of U.S. Remodulin patients. Other common side effects associated with both subcutaneous and intravenous Remodulin include headache, diarrhea, nausea, jaw pain, vasodilation and edema. As noted below under Research and Development, we are working on a prodrug version of Remodulin called RemoPro to reduce the infusion site pain associated with subcutaneous administration of treprostinil.
Tyvaso
Tyvaso was approved by the FDA and launched commercially in the United States in 2009. We sell Tyvaso to the same specialty pharmaceutical distributors in the United States that distribute Remodulin. We recognized $415.6 million, $415.2 million and $372.9 million in Tyvaso net product sales, representing 29 percent, 25 percent and 22 percent of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively. Tyvaso is approved and commercialized in the United States, Israel and Argentina.
Tyvaso is administered four times a day by inhaling up to nine breaths during each treatment session, which takes approximately three minutes. Tyvaso is required to be administered using our proprietary Tyvaso Inhalation System, which consists of an ultra-sonic nebulizer and related accessories. A single ampule containing Tyvaso is emptied into the Tyvaso Inhalation System once per day, so the Tyvaso Inhalation System only needs to be cleaned once daily. Tyvaso is regulated by the FDA as a drug-device combination product, consisting of Tyvaso drug product and the Tyvaso Inhalation System.
Ventavis® (iloprost) is the only other FDA-approved inhaled prostacyclin analogue. Patients need to inhale Ventavis six to nine times per day via a nebulizer. According to its package insert, each Ventavis inhalation consists of four to ten minutes of continuous inhalation via the nebulizer. We completed an open-label study in the United States to investigate the clinical effects of switching patients from Ventavis to Tyvaso. Patients in this study saved an average of approximately 1.4 hours per day when administering Tyvaso compared to Ventavis.
Studies establishing the effectiveness of Tyvaso included predominately patients with functional class III symptoms (may not have symptoms at rest but activities are greatly limited by shortness of breath, fatigue, or near fainting). Tyvaso was generally well tolerated in our trials. The most common side effects were transient cough, headache, nausea, dizziness and flushing.
In August 2018, we settled patent litigation with Watson Laboratories, Inc. (Watson) related to its abbreviated new drug application (ANDA) seeking to market a generic version of Tyvaso in the United States. Under the terms of this settlement, Watson may launch 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. For further detail, see the section below entitled Patents and Other Proprietary Rights, Strategic Licenses and Market Exclusivity—Generic Competition.
7
Orenitram
Orenitram is the only FDA approved, orally administered prostacyclin analogue, and is the only oral PAH prostacyclin class therapy approved in the United States that is titratable to a maximum tolerated dose, without a dose ceiling. 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 clinical worsening event versus placebo by 25 percent (p=0.0391), driven by a 61 percent decrease in the risk of disease progression for patients taking Orenitram, when compared to placebo (p=0.0002). In October 2019, the FDA approved a supplement to our new drug application (NDA) to update the Orenitram label to reflect these FREEDOM-EV results. As a result, Orenitram is now indicated to delay disease progression and improve exercise capacity. Mortality rates were similar between Orenitram and placebo groups at the end of randomized treatment. However, in participants for which data are available (89 percent), Orenitram was associated with a 37 percent decreased risk of mortality compared with placebo at study closure (p=0.0324). This mortality data is not reflected in the FDA-approved label since it includes data accrued in the open-label extension study.
Secondary endpoints in the FREEDOM-EV study included changes from baseline in six-minute walk distance (6MWD), Borg dyspnea score (shortness of breath test), functional class, NT-proBNP levels, and combined 6MWD and Borg dyspnea score. Secondary endpoint data, which are not included in the updated FDA-approved labeling, are summarized below:
| ● | Change in 6MWD: The median 6MWD trended toward improvement at week 24 (Hodges-Lehmann treatment estimate: 7 meters). Median 6MWD improved with Orenitram at weeks 36 (13 meters) and 48 (21 meters) compared to placebo. |
| ● | Change in Borg dyspnea score and WHO functional class: When classified categorically as “improved,” “no change,” or “deteriorated,” participants in the Orenitram group exhibited a significantly positive shift in Borg dyspnea score and WHO functional class compared to placebo at weeks 24, 36, and 48. |
| ● | Change in NT-proBNP levels: NT-proBNP levels were significantly improved with Orenitram at weeks 24 and 36. Per the study protocol, NT-proBNP was not assessed at week 48. |
| ● | Change in combined 6MWD and Borg dyspnea score: Combined 6MWD and Borg dyspnea score was significantly improved with Orenitram when assessed at week 24 compared to placebo. |
We sell Orenitram to the same specialty pharmaceutical distributors in the United States that distribute Remodulin and Tyvaso. We recognized $225.3 million, $205.1 million and $185.8 million in Orenitram net product sales, representing 16 percent, 13 percent and 11 percent of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively. The studies that established efficacy included predominately patients with functional class II-III symptoms and etiologies of idiopathic or heritable PAH (66 percent) or PAH associated with connective tissue disease (26 percent). The most common side effects observed in our clinical studies were headache, nausea and diarrhea. Orenitram is currently only approved in the United States, but we are evaluating whether the FREEDOM-EV results could support marketing applications in other countries.
8
In February 2018, we settled patent litigation with Actavis Laboratories FL, Inc. (Actavis) related to its ANDA seeking to market a generic version of Orenitram in the United States. Under the terms of this settlement, Actavis may launch 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. For further detail, see the section below entitled Patents and Other Proprietary Rights, Strategic Licenses and Market Exclusivity—Generic Competition.
Adcirca
Adcirca is a PDE-5 inhibitor, the active pharmaceutical ingredient of which is tadalafil. Tadalafil is also the active pharmaceutical ingredient in Cialis®, which is marketed by Eli Lilly and Company (Lilly) for the treatment of erectile dysfunction. We acquired the commercial rights to Adcirca for the treatment of PAH in the United States from Lilly in 2008. We sell Adcirca at prices established by Lilly, which are at parity with Cialis pricing. We recognized $107.2 million, $323.7 million and $419.7 million in Adcirca net product sales, representing seven percent, 20 percent and 24 percent of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively.
In 2009, the FDA approved Adcirca with a recommended dose of 40 mg, making it the only once-daily PDE-5 inhibitor for the treatment of PAH. Adcirca is indicated to improve exercise ability in patients with PAH. Studies establishing effectiveness included predominately patients with functional class II-III symptoms. Headaches were the most commonly reported side effect.
In September 2014, Gilead Sciences, Inc. (Gilead) announced the results of a study of ambrisentan (an ETRA) and tadalafil in PAH patients as a first-line combination treatment, compared to treating PAH patients with only ambrisentan or tadalafil. In the study, first-line treatment with both therapies reduced the risk of clinical failure (a composite endpoint that incorporates clinical worsening events—death, hospitalization and disease worsening—and a component of unsatisfactory long-term clinical response) compared to a monotherapy treatment by 50 percent. Based on these results, in October 2015, the FDA approved an update to the NDA for Letairis® (ambrisentan), permitting the use of Letairis in combination with tadalafil for PAH to reduce the risks of disease progression and hospitalization for worsening PAH, and to improve exercise ability.
In May 2017, we amended our Adcirca license agreement with Lilly to clarify and extend the term of the agreement 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. Additional companies launched generic versions of Adcirca in February 2019. For further detail, see the section below entitled Patents and Other Proprietary Rights, Strategic Licenses and Market Exclusivity-Generic Competition.
Our license agreement with Lilly related to Adcirca expires on December 31, 2020.
9
Product to Treat Cancer — Unituxin
In March 2015, the FDA approved our Biologics License Application (BLA) for Unituxin, in combination with granulocyte-macrophage colony-stimulating factor (GM-CSF), interleukin-2 (IL-2), and 13-cis-retinoic acid (RA), for the treatment of patients with high-risk neuroblastoma (a rare form of pediatric cancer) who achieve at least a partial response to prior first-line multiagent, multimodality therapy. Unituxin is a chimeric, composed of a combination of mouse and human DNA, monoclonal antibody that induces antibody-dependent cell-mediated cytotoxicity, a mechanism of cell-mediated immunity whereby the immune system actively targets a cell that has been bound by specific antibodies. Unituxin therapy is associated with severe side effects, including infections, infusion reactions, hypokalemia, hypotension, pain, fever, and capillary leak syndrome. In November 2018, we received approval from Health Canada to market Unituxin, and we launched commercial sales of the product in Canada in late 2019.
We recognized $113.7 million, $84.8 million and $76.0 million in Unituxin net product sales, representing eight percent, five percent and four percent of our total revenues for the years ended December 31, 2019, 2018 and 2017, respectively.
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 2020-2022 timeframe) and medium-term pipeline programs (intended to result in product launches in the 2023-2026 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 (2020-2022)
Product | Mode of Delivery | Indication | Current Status | Our Territory |
Remunity™ | Continuous subcutaneous via pre-filled, semi-disposable system | PAH | Pharmacy-fill 510(k) cleared by the FDA; Launch expected by July 2020. | Worldwide |
Tyvaso (treprostinil) | Inhaled | Pulmonary hypertension associated with idiopathic pulmonary fibrosis (WHO Group 3) | Phase III | Worldwide |
Trevyent® (treprostinil) | Continuous subcutaneous via pre-filled, disposable PatchPump® system | PAH | NDA under FDA review; April 27, 2020 PDUFA date | Worldwide, subject to out-licenses granted in Europe, Canada and the Middle East |
Implantable System for Remodulin | Continuous intravenous via implantable pump | PAH | FDA approval received July 30, 2018; U.S. launch pending satisfaction of further regulatory requirements by Medtronic | United States, United Kingdom, Canada, France, Germany, Italy and Japan |
Treprostinil Technosphere® | Inhaled dry powder | PAH | Phase III BREEZE | Worldwide |
10
Medium-Term Pipeline Programs (2023-2026)
Implantable System for Remodulin
On July 30, 2018, we obtained FDA approval of the Implantable System for Remodulin in the United States. We developed this system in collaboration with Medtronic, Inc. (Medtronic). The system incorporates a proprietary Medtronic intravascular infusion catheter with Medtronic’s 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. The FDA approved Medtronic’s premarket approval application (PMA) for the device in December 2017, and our NDA for the use of Remodulin in the implantable pump in July 2018. Medtronic must satisfy certain conditions to its PMA approval before we can launch the Implantable System for Remodulin. As a result of recent FDA communications, Medtronic has indicated that these conditions will not be satisfied during 2020. We have no control over when or whether these conditions will be met.
11
In February 2019, we entered into a commercialization agreement under which Medtronic will manufacture and supply the Implantable System for Remodulin, and we will manufacture and supply Remodulin for use in the system. Each party will perform certain additional activities to support the commercialization of the Implantable System for Remodulin, and we will reimburse Medtronic’s costs to provide such support. We will pay Medtronic a royalty equal to ten percent of our net sales of Remodulin administered via the Implantable System for Remodulin. We have entered into an agreement with Caremark, L.L.C. (CVS Specialty) to provide refills of implanted pumps at its infusion centers. Once Medtronic satisfies its remaining PMA conditions, 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 December 2019, we announced a delay in the potential launch of the Implantable System for Remodulin from 2020 to 2021. These timelines are subject to a number of factors outside of our control, including Medtronic’s satisfaction of its PMA conditions and the ability of hospitals to complete training and other necessary preparations. We are also working with Medtronic to develop a next-generation system incorporating various enhancements.
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 with the FDA in April 2015, which required Medtronic to complete certain corrections and enhancements to the SynchroMed II pump and the associated quality system. The consent decree restricted Medtronic’s ability to manufacture and distribute the SynchroMed II infusion system, unless specific conditions were met, including retention of a third-party expert to inspect the affected quality system and certify that the quality system complies with the requirements of the consent decree. Medtronic completed the third-party certification audits in January 2017 and successfully completed an FDA inspection in June 2017. After the inspection, the FDA lifted the consent decree restrictions on manufacturing, distribution and design in September 2017. The consent decree remains in effect, with ongoing obligations for annual third-party audits continuing until September 2020. Non-compliance by Medtronic with its consent decree could interrupt the manufacture and sale of the Implantable System for Remodulin.
Remunity, RemoPro and RemoLife
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. In November 2019, we entered into a supply agreement with an affiliate of DEKA to manufacture and supply the Remunity system to us. Under the terms of the agreement, we will reimburse all of DEKA’s and its affiliates’ costs to manufacture the Remunity system.
In May 2019, DEKA obtained FDA 510(k) clearance of a patient-filled version of the Remunity system. On February 24, 2020, we announced FDA clearance of an additional 510(k) filing enabling Remunity cartridges to be pre-filled with Remodulin by contracted specialty pharmacies in order to improve convenience for patients. We plan to make the pharmacy-filled Remunity system available to patients by July 2020.
We are also developing a version of the system that will include disposable components that are prefilled as part of the manufacturing process. This version is expected to have an extended shelf life and simplified supply chain and will allow patients to keep more drug product on hand.
12
We are also conducting a series of 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. As a prodrug, 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.
Finally, we are also collaborating with Smiths Medical on RemoLife, a next-generation pump for Remodulin.
Trevyent
In August 2018, we acquired SteadyMed Ltd. (SteadyMed), which is developing Trevyent, a 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 the 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 submitted a 505(b)(1) NDA for Trevyent to the FDA in June 2019. The FDA accepted the NDA for review in September 2019, assigning the NDA a Prescription Drug User Fee Act (PDUFA) target action date of April 27, 2020.
Recent FDA interactions have included a mid-cycle information request from the FDA noting several significant deficiencies. We have provided written responses to the FDA addressing these deficiencies in hopes of preserving the current PDUFA date; however, based on recent discussions with the FDA, we believe our PDUFA date could be extended beyond April 2020, and/or we may receive a complete response letter from the FDA, if the agency is not satisfied with our responses to its comments.
OreniPro
We are developing an oral prodrug version of Orenitram we call OreniPro, in order to provide increased tolerability and convenience through a once-daily dosing regimen. We submitted an Investigational New Drug Application (IND) to the FDA in January 2020, and plan to commence phase I studies in the near-term.
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 we are able to demonstrate good cause for the failure. We are pursuing a label expansion for Unituxin in combination with two other drugs to treat cancer, irinotecan and temozolomide, for the treatment of pediatric patients with relapsed or refractory neuroblastoma, based on the results of the ANBL1221 study conducted by the Children’s Oncology Group. We plan to meet with the FDA to discuss the proposed label expansion in the first half of 2020 and file the supplemental BLA for approval shortly thereafter.
We recently completed a study (DISTINCT) of Unituxin in adult patients with small cell lung cancer, which is another GD2-expressing cancer. In February 2020, we announced that this study failed to meet its primary endpoint. We are also conducting preclinical research to determine Unituxin’s potential activity against other types of GD2-expressing tumors.
13
Unituxin therapy is associated with severe side effects, including infections, infusion reactions, hypokalemia, hypotension, pain, fever, and capillary leak syndrome. In post-approval use of Unituxin, the adverse reactions of prolonged urinary retention, transverse myelitis, and reversible posterior leukoencephalopathy syndrome have been observed. The Unituxin label also includes a boxed warning related to serious infusion reactions and neurotoxicity.
Finally, we are developing a fully humanized (non-chimeric) version of dinutuximab, the active ingredient in Unituxin. We expect this new version to reduce some of the side effects associated with Unituxin, which is a chimeric composed of a combination of mouse and human proteins.
Tyvaso
On February 24, 2020, we reported the results of the INCREASE phase III registration study of Tyvaso in patients with WHO Group 3 pulmonary hypertension associated with interstitial lung disease (including idiopathic pulmonary fibrosis and combined pulmonary fibrosis and emphysema) (PH-ILD). Based on our preliminary analysis of the results, the INCREASE study met its primary endpoint of demonstrating improvement in 6MWD. Tyvaso increased 6MWD by 21 meters versus placebo (p=0.0043, Hodges-Lehmann estimate) after 16 weeks of treatment. Tyvaso also showed benefits across several key subgroups, including etiology of PH-ILD, disease severity, age, gender, baseline hemodynamics, and dose. Significant improvements were also observed in each of the study’s secondary endpoints, including reduction in the cardiac biomarker NT-proBNP, time to first clinical worsening event, change in peak 6MWD at Week 12, and change in trough 6MWD at week 15. Treatment with Tyvaso of up to 12 breaths per session, four times daily, was well tolerated and the safety profile was consistent with previous Tyvaso studies and known prostacyclin-related adverse events.
We expect to submit the results to the FDA by mid-year in support of an efficacy supplement that is expected to result in revised labeling that reflects the outcome of the INCREASE study. Detailed study results will be provided through scientific disclosure at upcoming conferences and in peer-reviewed publications.
We are also enrolling a phase III registration study called PERFECT, which is a study of Tyvaso in patients with WHO Group 3 pulmonary hypertension associated with chronic obstructive pulmonary disease (PH-COPD).
There are presently no FDA approved therapies indicated for the treatment of WHO Group 3 pulmonary hypertension. In the United States alone, we believe there are approximately 30,000 PH-ILD patients and 100,000 PH-COPD patients.
We are evaluating whether the INCREASE results could support marketing applications outside the United States.
Treprostinil Technosphere
We are developing a dry powder formulation of treprostinil called Treprostinil Technosphere for the treatment of PAH, under an in-license from MannKind Corporation (MannKind). Treprostinil Technosphere incorporates the dry powder formulation technology and Dreamboat® inhalation device technology used in MannKind’s Afrezza® (insulin human) Inhalation Powder product, which was approved by the FDA in 2014. If the FDA approves Treprostinil Technosphere, we believe this new inhaled treprostinil therapy will provide substantial lifestyle benefits to PAH patients, as compared with Tyvaso therapy, because it will be: (1) less time consuming to administer and easier to maintain as the device and drug will be provided in a pre-filled, single use disposable cassette eliminating the need for cleaning and filling; and (2) mobile and more convenient, as the compact design of the Dreamboat device and drug cassettes used with Treprostinil Technosphere can easily fit into the patient’s pocket and do not require electricity.
We commenced a clinical study (called BREEZE) in September 2019 to evaluate the safety and pharmacokinetics of switching PAH patients from Tyvaso to Treprostinil Technosphere. During the first half of 2020, we plan to commence a second clinical study in healthy volunteers to compare the pharmacokinetics of
14
Treprostinil Technosphere to Tyvaso. The FDA has indicated that these two studies, if successful, will be the only clinical studies necessary to support FDA approval.
Unexisome
Unexisome is a next generation, development-stage cell therapy utilizing exosomes to treat bronchopulmonary dysplasia (BPD), which is a chronic lung disease that affects newborns (mostly premature newborns) and infants. BPD results from damage to the lungs caused by mechanical ventilation (respirators) and long-term use of oxygen, and impacts approximately 12,000 infants annually. Exosomes are cell-secreted vesicles generated by virtually all cells, including cell types used in therapeutic applications. Exosomes serve as potent vehicles for cell-to-cell communication and include multiple mechanisms of action. In 2019, we commenced a phase I safety study of Unexisome in preterm neonates at high risk for BPD.
Ralinepag
Ralinepag is a next-generation, oral, selective and potent prostacyclin receptor agonist being developed for the treatment of PAH. We are conducting two phase III studies of ralinepag: (1) ADVANCE OUTCOMES, which is an event-driven study of ralinepag in PAH patients (with a primary endpoint of time to first clinical event); and (2) ADVANCE CAPACITY, studying the effect of ralinepag on exercise capacity in PAH patients (with a primary endpoint of change in peak oxygen uptake via cardiopulmonary exercise test). Both of these studies are global, multi-center, placebo-controlled trials of patients on approved oral background PAH therapies.
Aurora-GT
We are enrolling a phase II/III study (called SAPPHIRE) of a gene therapy product called Aurora-GT, in which a PAH patient’s own endothelial progenitor cells are isolated, transfected with the gene for human endothelial NO-synthase (eNOS), expanded ex-vivo and then delivered to the same patient. This product is intended to rebuild the blood vessels in the lungs that are destroyed by PAH. This study is being conducted in Canada, and is sponsored by Northern Therapeutics, Inc., a Canadian entity in which we have a 49.7 percent voting stake and a 71.8 percent financial stake. We have the exclusive right to pursue this technology in the United States, and plan to seek FDA approval of Aurora-GT if SAPPHIRE is successful.
LNG01 (formerly SM04646)
We are developing LNG01, a Wnt pathway inhibitor formerly known as SM04646, which we in-licensed from Samumed LLC (Samumed) in September 2018, for the treatment of idiopathic pulmonary fibrosis (IPF). The Wnt pathway is one of the primary signaling pathways essential for the normal development of all multicellular animals, and for the growth and maintenance of various adult tissues. Recent evidence suggests that aberrant Wnt signaling may be involved in the pathogenesis of chronic lung disease such as IPF. Samumed completed a phase I, multiple dose clinical trial in April 2019, and our subsidiary, Lung Biotechnology PBC, is planning additional clinical studies.
15
Organ Manufacturing
Each year, end-stage organ failure kills millions of people. A significant number of these patients could have benefited from an organ transplant. Unfortunately, the number of usable, donated organs available for transplantation has not grown significantly over the past half century while the need has soared. Our long-term goals are aimed at addressing this shortage. With advances in technology, we believe that creating an unlimited supply of tolerable manufactured organs is now principally an engineering challenge, and we are dedicated to finding engineering solutions. Since 2011, we have been engaged in research and development of a variety of technologies designed to increase the supply of transplantable organs and tissues and to improve outcomes for transplant recipients. These programs include preclinical research and development of alternative tissue sources through tissue and organ xenotransplantation, regenerative medicine, biomechanical lungs, and other technologies to create engineered organs and organ tissues. Although our primary focus is on engineered lungs, we are also developing technologies for other engineered organs, such as kidneys and hearts, and our manufactured lungs, kidneys and hearts have set records for viability in FDA-required animal models. In February 2018, we reached a significant milestone by achieving 30-day survival of our genetically modified porcine lungs in FDA-required animal models. In 2019, we entered into a collaboration agreement with the University of Alabama at Birmingham to develop a pilot-scale, designated pathogen-free facility to house genetically modified pigs, with a goal of commencing human clinical trials of xenotransplanted kidneys from pigs to humans in the near term. We are also developing technologies to improve outcomes for lung transplant recipients and to increase the supply of donor lungs through ex-vivo lung perfusion. While we continue to develop and commercialize therapies for rare and life-threatening conditions, we view organ manufacturing as the ultimate technology solution for a broad array of diseases, many of which (such as PAH) have proven incurable to date through more traditional pharmaceutical and biologic therapies. For this reason, in 2015 we created a wholly-owned public benefit corporation called Lung Biotechnology PBC, chartered with the express purpose of “address[ing] the acute national shortage of transplantable lungs and other organs with a variety of technologies that either delay the need for such organs or expand the supply.”
Sales and Marketing
Our marketing strategy for our commercial PAH products is to use our sales and marketing teams to reach out to the prescriber community to: (1) increase PAH awareness; (2) increase understanding of the progressive nature of PAH and the importance of early treatment; and (3) increase awareness of our commercial products and how they fit into the various stages of disease progression and treatment.
Distribution of Commercial Products
United States Distribution of Remodulin, Tyvaso, Orenitram and Unituxin
We distribute Remodulin, Tyvaso and Orenitram throughout the United States through two contracted specialty pharmaceutical distributors: Accredo Health Group, Inc. and its affiliates, including Curascript SD Specialty Distribution (collectively Accredo), and CVS Specialty. These distributors are required to maintain certain minimum inventory levels in order to ensure an uninterrupted supply to patients who are prescribed our therapies. We compensate Accredo and CVS Specialty on a fee-for-service basis for certain ancillary services in connection with the distribution of these products. If any of our distribution agreements expire or terminate, we may, under certain circumstances, be required to repurchase any unsold Remodulin, Tyvaso or Orenitram inventory held by our distributors.
16
These specialty pharmaceutical distributors are responsible for assisting patients with obtaining reimbursement for the cost of our treprostinil-based products and providing other support services. Under our distribution agreements, we sell each of our treprostinil-based products to these distributors at a transfer price that we establish. We have also established patient assistance programs in the United States, which provide our treprostinil-based products to eligible uninsured or under-insured patients at no charge. Accredo and CVS Specialty assist us with the administration of these programs.
We distribute Unituxin throughout the United States through an exclusive distribution agreement with ASD Specialty Healthcare, Inc. (ASD), an affiliate of AmerisourceBergen Corporation. Under this agreement, we sell Unituxin to ASD at a transfer price that we establish, and we pay ASD fees for services provided in connection with the distribution and support of Unituxin.
To the extent we increase the price of any of these products, increases are typically in the single-digit percentages per year.
United States Distribution of Adcirca
Under our manufacturing and supply agreement with Lilly, Lilly manufactures and distributes Adcirca on our behalf through its wholesaler network in the same manner that it distributes its own pharmaceutical products. Under the terms of this agreement, we take title to Adcirca upon completion of its manufacture by Lilly. Adcirca is shipped to customers in accordance with purchase orders received by Lilly. Upon shipment, Lilly sends an invoice and collects the amount due from the customer subject to customary discounts and rebates, if any. Although Lilly provides these services on our behalf, we maintain the risk of loss as it pertains to inventory, product returns and non-payment of invoices. The manufacturing and supply agreement will continue in effect until the December 31, 2020 expiration or earlier termination of our license agreement for Adcirca. Lilly retains authority under the license agreement for all regulatory activities with respect to Adcirca, as well as its retail pricing, which has been and is expected to remain at price parity with Cialis. We have also established a patient assistance program in the United States, which provides Adcirca to eligible uninsured or under-insured patients at no charge.
International Distribution of Remodulin, Tyvaso and Unituxin
We currently sell Remodulin outside the United States to various distributors, each of which has exclusive distribution rights in one or more countries within Europe, the Middle East, Asia and South and Central America. We sell Tyvaso commercially to distributors that have exclusive distribution rights in Israel and Argentina. We also distribute Remodulin and Unituxin in Canada through a specialty pharmaceutical wholesaler. In some of the European markets where we are not licensed to market Remodulin, such as Spain and the United Kingdom, we sell (but do not market) Remodulin on a named-patient basis in which therapies are approved for individual patients by a national medical review board, hospital or health plan on a case-by-case basis. We also maintain similar named-patient programs for Tyvaso in certain countries.
Patents and Other Proprietary Rights, Strategic Licenses and Market Exclusivity
Our success depends in part on our ability to obtain and maintain patent protection for our products, preserve trade secrets, prevent third parties from infringing upon our proprietary rights and operate without infringing upon the proprietary rights of others in the United States and worldwide. Many of these proprietary rights stem from licenses and other strategic relationships with third parties. In addition to intellectual property rights, U.S. and international regulatory authorities often provide periods of market exclusivity for manufacturers of biopharmaceutical products.
17
Patents provide the owner with a right to exclude others from practicing an invention. Patents may cover the active ingredients, uses, formulations, doses, administrations, delivery mechanisms, manufacturing processes and other aspects of a product. The period of patent protection for any given product generally depends on the expiration date of various patents and may differ from country to country according to the type of patents, the scope of coverage and the remedies for infringement available in a country. Most of our commercial products and investigational products are protected by patents that expire on varying dates.
Significant legal questions exist concerning the extent and scope of patent protection for biopharmaceutical products and processes in the United States and elsewhere. Accordingly, there is no certainty that patent applications owned or licensed by us will be issued as patents, or that our issued patents will afford meaningful protection against competitors. Once issued, patents are subject to challenge through both administrative and judicial proceedings in the United States and other countries. Such proceedings include re-examinations, inter partes reviews, post-grant reviews and interference proceedings before the U.S. Patent and Trademark Office, as well as opposition proceedings before the European Patent Office. Litigation may be required to enforce, defend or obtain our patent and other intellectual property rights. Any administrative proceeding or litigation could require a significant commitment of our resources and, depending on outcome, could adversely affect the scope, validity or enforceability of certain of our patent or other proprietary rights.
Remodulin, Tyvaso and Orenitram Proprietary Rights
We have a number of issued patents and pending patent applications covering our treprostinil-based products, Remodulin, Tyvaso and Orenitram. We have been granted two patents related to manufacturing treprostinil that expire in 2028 and are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book (see Orange Book below), for Remodulin, Tyvaso and Orenitram.
In addition to the treprostinil patents noted above, we have other patents specific to our individual treprostinil-based products, including the following:
| ● | Remodulin. We have been granted three U.S. patents covering an improved diluent for Remodulin, which expire in 2028 and 2029. We have another patent covering intravenous administration of Remodulin with certain diluents, which expires in 2024. We have been granted another patent covering a treprostinil formulation with a citrate buffer, which expires in 2024. All five of these patents are listed in the Orange Book. |
| ● | Tyvaso. We have been granted two U.S. patents, as well as patents in other countries, for Tyvaso that cover methods of treating PAH by inhaled delivery. These patents expired in the United States in 2018 and will expire in various countries throughout the world in 2020. We have also been granted two patents directed to a method of treating pulmonary hypertension and a kit for treating pulmonary hypertension. These two patents expire in 2028 and are listed in the Orange Book. Counterparts to these two patents are issued in several other countries. |
| ● | Orenitram. Our patents for Orenitram cover methods of use for treating PAH, orally administered formulations, controlled moisture storage and manufacturing methods, as well as those covering controlled release formulations licensed to us by Supernus Pharmaceuticals Inc. (Supernus). These patents will expire in the United States between 2024 and 2031 and in various countries throughout the world between 2024 and 2030. |
We have additional pending U.S. and international patent applications related to Remodulin, Tyvaso and Orenitram.
18
Orange Book
In seeking approval of a drug through an NDA or upon issuance of new patents following approval of an NDA, applicants are required to submit to the FDA each patent that has claims covering the applicant’s product or a method of using the product. Each of the patents submitted is then published in the Orange Book. See Governmental Regulation—Patent Term and Regulatory Exclusivity below for further details. Remodulin currently has eight unexpired Orange Book listed patents with expiration dates ranging from 2024 to 2029. Tyvaso currently has four unexpired Orange Book listed patents expiring in 2028. Orenitram currently has twelve unexpired Orange Book listed patents with expiration dates ranging from 2024 to 2031. Additional patent applications are pending, and if granted, may be eligible for listing in the Orange Book.
Regulatory Exclusivity
Remodulin’s regulatory exclusivity in the United States and Europe has expired. In 2010, the FDA granted orphan drug designation for Tyvaso, which resulted in an orphan exclusivity period that expired in July 2016. In 2004, the European Medicines Agency (EMA) designated Tyvaso an orphan medicinal product for the treatment of both PAH and chronic thromboembolic pulmonary hypertension, which would confer a ten-year exclusivity period commencing if and when we obtain marketing approval. As a result of FDA approval of our NDA for Orenitram as a new dosage form, Orenitram had three years of market exclusivity for PAH, which expired in December 2016. In November 2019, following approval of our supplemental NDA to reflect the FREEDOM-EV results in the Orenitram label, the FDA granted orphan exclusivity for the new indication that Orenitram delays disease progression in PAH patients. This exclusivity expires in October 2026. In addition, we are pursuing litigation challenging the FDA’s earlier denial of orphan drug designation for Orenitram’s initial indication that it improves exercise capacity in PAH patients.
Supernus License
In 2006, we entered into an exclusive license agreement with Supernus to use certain of its technologies in manufacturing Orenitram. Under the agreement, we paid Supernus certain amounts upon the achievement of specified milestones based on the development and commercial launch of Orenitram for PAH, and we would be obligated to make additional milestone payments if we develop Orenitram for a second indication. In addition, the agreement provides that we will pay a single-digit percentage royalty based on net worldwide sales. The term of this royalty expires during the second quarter of 2026.
Generic Competition
We settled litigation with Sandoz, Inc. (Sandoz) relating to its ANDA seeking FDA approval to market a generic version of Remodulin. Under the settlement agreement, Sandoz was permitted to market its generic version of Remodulin as early as June 2018. On March 25, 2019, Sandoz announced the availability of its generic product in the United States, and that it was entitled to six months of marketing exclusivity before other companies would be permitted to market their generic versions of Remodulin in the United States. We have also entered into similar settlement agreements with Teva Pharmaceuticals USA, Inc. (Teva), Par Sterile Products, LLC (Par), Dr. Reddy’s Laboratories, Inc. (Dr. Reddy’s) and Alembic Pharmaceuticals Ltd. (Alembic) permitting each of them to market a generic version of Remodulin in the United States. Par and Teva received FDA approval for their ANDAs in late September 2019, and, in early October 2019, Teva announced its plan to launch its generic version of Remodulin. To our knowledge, the FDA has not yet approved the ANDAs filed by Dr. Reddy’s or Alembic. Through December 31, 2019, we have seen minimal erosion of Remodulin sales as a result of generic competition in the United States. We are currently engaged in litigation with Sandoz and its marketing partner, RareGen, LLC, related to the infusion devices used to deliver Remodulin subcutaneously. See Note 16–Litigation, to our consolidated financial statements included in this Report.
19
Internationally, regulatory authorities in various European countries began approving generic versions of Remodulin in 2018, followed by pricing approvals and launches in certain of these countries in 2019, with additional pricing approvals and launches expected in 2020. As a result, we anticipate that our international Remodulin revenues will come under increasing pressure, due to increased competition and a reduction in our contractual transfer price for Remodulin sold by certain international distributors for sales in countries in which the pricing of Remodulin is impacted by the generic competition. Our non-U.S. net product sales for Remodulin were $120.9 million and $95.4 million for the years ended December 31, 2019 and 2018, respectively.
We also settled litigation with Watson and Actavis related to their ANDAs seeking FDA approval to market generic versions of Tyvaso and Orenitram, respectively, before the expiration of certain of our U.S. patents. Under the settlement agreements, Watson and Actavis can market their generic versions of Tyvaso and Orenitram in the United States beginning in January 2026 and June 2027, respectively, although they may be permitted to enter the market earlier under certain circumstances.
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 related to our products, there can be no assurance that we will prevail in defending our patent rights, or that additional challenges from other ANDA filers or other challengers will not surface with respect to our products. Our patents could be invalidated, found unenforceable or found not to cover one or more generic forms of our products. If any ANDA filer were to receive approval to sell a generic version of our products 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 FDA-conferred regulatory exclusivity expired in May 2018, leading to the launch of a generic version of Adcirca by Mylan N.V. in August 2018, and by additional companies in February 2019. Generic competition for Adcirca has had a material adverse impact on Adcirca net product sales. In addition, we expect declines in patient demand will cause Adcirca inventory held by distributors and other downstream customers to expire unsold. Our allowance for product returns was $14.2 million and $22.4 million as of December 31, 2019 and 2018, 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 I, Item 1A—Risk Factors included in this Report.
20
Adcirca License Agreement
In 2008, Lilly granted us an exclusive license to develop, market, promote and commercialize Adcirca for the treatment of pulmonary hypertension in the United States. We agreed to pay Lilly royalties based on our net product sales of Adcirca. Lilly retained the exclusive rights to develop, manufacture and commercialize pharmaceutical products containing tadalafil, the active pharmaceutical ingredient in Adcirca, for the treatment of pulmonary hypertension outside of the United States and for the treatment of other diseases worldwide. Lilly retained authority for all regulatory activities with respect to Adcirca and for setting the wholesale price of Adcirca, which has been and is expected to continue to be at price parity with Cialis. In May 2017, we amended our Adcirca license agreement with Lilly in order to clarify and extend the term of the agreement and to amend the economic terms of the agreement following a patent expiry in November 2017. As amended, our license agreement expires on December 31, 2020, following which we will no longer sell Adcirca unless we and Lilly agree to extend the term of our license agreement. Following expiration we will remain obligated to refund the purchase price of any Adcirca that we previously sold to distributors that expires unsold. For additional discussion, refer to our Adcirca product description contained in Part I, Item 1—Business Overview—Products to Treat Pulmonary Arterial Hypertension.
We also agreed to purchase Adcirca at a fixed manufacturing cost. The agreement provides a mechanism, generally related to the increase in the national cost of pharmaceutical manufacturing, pursuant to which Lilly may raise the manufacturing cost of Adcirca.
Unituxin Proprietary Rights and Regulatory Exclusivity
We have orphan drug exclusivity in the United States for Unituxin, expiring March 2022, which precludes the FDA from approving any application to market the same drug for the same indication, except in limited circumstances. In addition, approval of our BLA conferred a 12-year data exclusivity period through March 2027, during which the FDA may not approve a biosimilar for Unituxin. Under a non-exclusive license agreement with The Scripps Research Institute, we pay a royalty of one percent of Unituxin net sales. We have no patents covering Unituxin.
21
Medtronic Agreements
As noted above, we are collaborating with Medtronic to develop and commercialize the Implantable System for Remodulin. Following FDA approval of the Implantable System for Remodulin, we entered into a commercialization agreement with Medtronic in February 2019, under which we will collaborate with Medtronic to commercialize the Implantable System for Remodulin in the United States. This agreement provides that the Implantable System for Remodulin will be exclusive to Remodulin, and further provides that we will not work with any third party to develop a competing implantable system to deliver Remodulin in the United States. The commercialization agreement has an initial term of five years, which may be extended for additional one-year terms if mutually agreed by the parties. Either party may terminate the commercialization agreement immediately for safety, quality or regulatory concerns, in the event of the other party’s bankruptcy or insolvency, or in the case of a material breach by the other party that remains uncured following the relevant cure period. In addition, Medtronic may terminate the commercialization agreement upon 180 days’ notice if Medtronic elects to discontinue its drug delivery business, and either party may terminate the commercialization agreement without cause on 180 days’ notice to the other party, after the initial five-year term. For further details, see the section above entitled Research and Development—Implantable System for Remodulin.
The Implantable System for Remodulin was developed under a development agreement with Medtronic that covers the treatment of PAH in the United States, United Kingdom, Canada, France, Germany, Italy and Japan. The development agreement provides that the system will be exclusive to Remodulin in these countries, subject to certain conditions. We continue to work with Medtronic under the development agreement to fund further enhancements to the system. The development agreement has similar termination rights to the commercialization agreement described above.
DEKA Agreements
In December 2014, we entered into an exclusive agreement with DEKA to develop a pre-filled, semi-disposable system for subcutaneous delivery of Remodulin, which we refer to as Remunity. Our agreement with DEKA expires on the last to occur of twenty-five years from the first product launch under the agreement, or upon the expiration of the last valid claim of a patent licensed from DEKA under the agreement that covers the Remunity system. Either party may terminate the agreement immediately upon a material breach by the other party that is uncured following the relevant cure period, or in the event of the other party’s bankruptcy or insolvency. In November 2019, we entered into a supply agreement with an affiliate of DEKA to manufacture and supply the Remunity system. See the discussion above under Research and Development—Remunity, RemoPro and RemoLife for further detail regarding these agreements. The Remunity system is covered by issued patents and pending patent applications both in the U.S. and other countries. The expiration dates of currently issued U.S. patents range from 2027 through 2033.
Trevyent
In 2016, the FDA granted orphan designation for Trevyent for the treatment of PAH. Thus, the FDA should grant orphan drug exclusivity if an NDA for Trevyent is approved; such exclusivity would extend for seven years from approval. Trevyent is protected by a variety of issued patents expiring at various dates ranging from 2024 to the early 2030s. Additional patent applications for Trevyent are pending.
Treprostinil Technosphere and the MannKind Agreement
In September 2018, we entered into a worldwide, exclusive license and collaboration agreement with MannKind for the development and commercialization of Treprostinil Technosphere for the treatment of PAH. The agreement became effective on October 15, 2018.
22
Under our agreement with MannKind, we are responsible for global development, regulatory and commercial activities related to Treprostinil Technosphere, and we share manufacturing responsibilities with MannKind. Under the terms of the agreement, we paid MannKind $45.0 million following the effectiveness of the agreement in October 2018, and we are required to make potential milestone payments to MannKind of up to $50.0 million upon the achievement of specific development targets. In 2019, the first and second milestone payments became due and we paid $12.5 million and $12.5 million, respectively, related to those milestones. 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. We will pay MannKind up to $40.0 million in additional option exercise and development milestone payments for each product (if any) added to the license pursuant to this option, as well as a low double-digit royalty on our net sales of any such product.
Under our license agreement with MannKind, we have an exclusive license to a variety of granted and pending patents and patent applications related to treprostinil inhalation powder and the Dreamboat® device, including multiple patent families covering the U.S. and other major market countries. These patents cover drug formulation, devices and device components, and manufacturing processes and intermediates. Expiration dates for issued patents range from the mid-2020s to the mid-2030s. Additional patents subject to pending patent applications, if issued, would have expiration dates in the late 2030s. Many of these patents would be eligible for listing in the Orange Book.
Ralinepag and the Arena Agreement
On November 15, 2018, we entered into an exclusive license agreement with Arena Pharmaceuticals, Inc. (Arena) related to ralinepag. On January 24, 2019, in connection with the closing of the transactions contemplated by the license agreement: (1) Arena granted to us perpetual, irrevocable and exclusive rights throughout the universe to develop, manufacture and commercialize ralinepag; (2) Arena transferred to us certain other assets related to ralinepag, including, among others, related domain names and trademarks, permits, certain contracts, inventory, regulatory documentation, IND Application No. 109021 (related to ralinepag) and non-clinical, pre-clinical and clinical trial data; (3) we assumed certain limited liabilities from Arena, including, among others, all obligations arising after the closing under the assumed contracts and the IND described above; and (4) we paid Arena $800.0 million, which we expensed as acquired in-process research and development and included within research and development expenses on our consolidated statements of operations for the year ended December 31, 2019. We will also pay Arena: (1) a one-time payment of $250.0 million for the first, if any, marketing approval we receive in the United States for an inhaled version of ralinepag to treat PAH; (2) a one-time payment of $150.0 million for the first, if any, marketing approval we receive in any of Japan, France, Italy, the United Kingdom, Spain or Germany for an oral version of ralinepag to treat any indication; and (3) low double-digit, tiered royalties on net sales of any pharmaceutical product containing ralinepag as an active ingredient, subject to certain adjustments for third party license payments.
Under our license agreement with Arena, we have an exclusive license to a variety of granted and pending patents and applications related to ralinepag covering drug formulation, manufacturing and dosage, among others. Many of these patents and patent applications would be eligible for listing in the Orange Book. Based on potential patent term extensions and additional patent filings, we believe U.S. patent protection for ralinepag will likely last through at least the mid-2030s.
23
LNG01 and the Samumed Agreement
In September 2018, we entered into an exclusive license agreement with Samumed providing us exclusive U.S. and Canadian rights to SM04646 (now referred to as LNG01) for treatment of IPF. Under our agreement with Samumed, we paid Samumed $10.0 million up-front, and we will pay Samumed additional consideration of up to $340.0 million upon the achievement of specific development milestones, plus up to low double-digit royalties on our net sales of the product. Under the terms of the agreement, our subsidiary, Lung Biotechnology PBC, will conduct and fund all development, regulatory and commercialization activities for LNG01 in the United States and Canada. Samumed retains development and commercialization rights for LNG01 for all markets outside of these two countries.
Under our license agreement with Samumed, we have an exclusive license to a variety of granted and pending patents and applications related to LNG01 covering drug formulation, manufacturing and dosage, among others. Many of these patents and patent applications would be eligible for listing in the Orange Book. Based on potential patent term extensions and additional patent filings, we believe U.S. patent protection for LNG01 will likely last through at least the mid-2030s.
Other
We are party to various other license agreements related to therapies and technologies under development. These license agreements require us to make payments based on a percentage of sales if we are successful in commercially developing these therapies, and may require other payments upon the achievement of certain milestones.
Manufacturing and Supply
We manufacture our primary supply of Remodulin, Tyvaso, Orenitram and Unituxin at our own facilities. In particular, we synthesize treprostinil, the active ingredient in Remodulin and Tyvaso, and treprostinil diolamine, the active ingredient in Orenitram, at our facility in Silver Spring, Maryland. We produce dinutuximab, the active ingredient in Unituxin, at our Silver Spring facility. We manufacture finished Tyvaso, Remodulin, and Unituxin at our Silver Spring facility. We manufacture Orenitram and we package, warehouse and distribute Remodulin, Tyvaso, Orenitram and Unituxin at our facility in Research Triangle Park, North Carolina.
We maintain a two-year inventory of Remodulin, Tyvaso and Orenitram based on expected demand, and we contract with third-party contract manufacturers to supplement our capacity, in order to mitigate the risk that we might not be able to manufacture internally sufficient quantities to meet patient demand. For example, Baxter Pharmaceutical Solutions, LLC is approved by the FDA, the EMA and various other international regulatory agencies to manufacture Remodulin for us. We rely on Catalent Pharma Solutions, Inc. to serve as an additional manufacturer of Tyvaso, and we rely entirely on Minnetronix Inc. to manufacture the nebulizer used in our Tyvaso Inhalation System. We obtained FDA approval of a third-party contract manufacturer to serve as an additional manufacturer of finished Unituxin drug product. We have constructed, and are qualifying, an additional facility in Silver Spring, Maryland that will increase our manufacturing capacity for dinutuximab, the active ingredient in Unituxin, and to produce the humanized version of dinutuximab that is in development. We have no plans to develop a redundant manufacturing source for finished Orenitram drug product.
Medtronic will be entirely responsible for manufacturing the Implantable System for Remodulin. DEKA and its affiliates will be entirely responsible for manufacturing the Remunity system, at least initially. We currently rely on third-party contract manufacturers to produce ralinepag, LNG01 (formerly SM04646), Trevyent and Treprostinil Technosphere.
24
Although we believe that additional third parties could provide similar products, services and materials, there are few companies that could replace our existing third-party manufacturers and suppliers. A change in supplier or manufacturer could cause a delay in the manufacturing, distribution and research efforts associated with our respective products or result in increased costs. See also Item 1A—Risk Factors included in this Report.
Competition
Many drug companies engage in research and development and commercialization of products to treat cardiopulmonary diseases and cancer. For the treatment of PAH, we compete with many approved products in the United States and the rest of the world, including the following:
| ● | Flolan, Veletri and generic epoprostenol. Flolan (epoprostenol) is a prostacyclin that is delivered by intravenous infusion. Glaxo began marketing Flolan in the United States in 1996. In 2008, the FDA approved Teva’s version of generic epoprostenol for the treatment of PAH. In 2010, Actelion (which was acquired by Johnson & Johnson in 2017) commenced sales of Veletri, which is another version of intravenous epoprostenol; |
| ● | Tracleer®. Tracleer (bosentan), an oral ETRA therapy for the treatment of PAH, was approved in 2001 in the United States and in 2002 in Europe. Tracleer is marketed worldwide by Actelion. Generic bosentan became available in the United States in 2019 and is also available in other countries; |
| ● | Ventavis and Ilomedin®. Approved in 2004 in the United States and in 2003 in Europe, Ventavis (iloprost) is an inhaled prostacyclin analogue. Ventavis is currently marketed by Actelion in the United States and by Bayer Schering Pharma AG (Bayer) in Europe. Iloprost is also marketed by Bayer in certain countries outside the United States in an intravenous form known as Ilomedin; |
| ● | Revatio® and generic sildenafil citrate. Approved in 2005 in the United States, Revatio (sildenafil citrate) is an oral PDE-5 inhibitor therapy manufactured by Pfizer. Revatio contains sildenafil citrate, the same active ingredient as Viagra®. In 2012, several companies began marketing generic formulations of sildenafil citrate; |
| ● | Letairis. Approved in 2007 in the United States, Letairis (ambrisentan) is an oral ETRA therapy marketed by Gilead for the treatment of PAH. In 2008, Glaxo received marketing authorization from the EMA for Letairis in Europe, where it is known as Volibris®. In 2015, Gilead announced the positive results of the AMBITION study of ambrisentan and tadalafil as an up-front combination therapy for PAH, which we believe has driven increased use of Letairis and Adcirca. Generic ambrisentan became available in the United States in 2019; |
| ● | Opsumit®. Approved in 2013 in both the United States and in the EU, Opsumit (macitentan) is an oral ETRA therapy marketed by Actelion for the treatment of PAH; |
| ● | Adempas®. Approved in 2013 in the United States and 2014 in the EU, Adempas (riociguat) is an sGC stimulator, which targets a similar vasodilatory pathway as PDE-5 inhibitors and is approved for chronic thromboembolic pulmonary hypertension and PAH. Adempas is an oral therapy marketed by Bayer; and |
| ● | Uptravi®. Approved in the United States in December 2015 and by the EMA in May 2016, Uptravi (selexipag) is an oral IP prostacyclin receptor agonist marketed by Actelion. Actelion also has applications pending in various other jurisdictions. Uptravi is also marketed in Japan by Nippon Shinyaku Co., Ltd. |
25
There are also a variety of investigational PAH therapies in the later stages of development, including the following:
| ● | LIQ861, a dry powder formulation of treprostinil designed for deep-lung delivery using a disposable inhaler being developed by Liquidia Technologies Inc. (Liquidia), which submitted an NDA to the FDA in January 2020; |
| ● | Bardoxolone, an oral therapy being developed by Reata Pharmaceuticals, Inc. for treatment of PAH associated with connective tissue disease. Reata is enrolling patients in a phase III clinical trial and announced it expects to announce the results during the first half of 2020; |
| ● | Sotatercept, an injected TGF-beta modulator being developed by Acceleron Pharma, Inc., which announced the successful completion of a phase II study in PAH patients in January 2020; |
| ● | Tocilizumab, an IL-6 inhibitor currently marketed by Genentech, Inc., a member of the Roche Group, as Actemra® for treatment of arthritis, giant cell arteritis and cytokine release syndrome. In 2018, Roche completed a phase II study of tocilizumab in PAH patients; |
| ● | CXA-10, an oral nitrated fatty acid compound being developed by Complexa Inc., which is currently enrolling PAH patients in a phase II study; |
| ● | PB1046, a subcutaneously-injected, sustained release analogue of the native human vasoactive intestinal peptide, which is being developed by PhaseBio Pharmaceuticals, Inc., and is currently undergoing a phase II study in PAH patients, the results of which are anticipated during the second half of 2020; |
| ● | RVT-1201 (rodatristat ethyl), a tryptophan hydroxylase inhibitor being developed by Altavant Sciences, Inc. to treat PAH. Altavant is currently enrolling a phase II clinical study in PAH patients; |
| ● | Ifetroban, a pharmacological antagonist of the thromboxane A2 / prostaglandin endoperoxide receptor being studied by Cumberland Pharmaceuticals Inc. in phase II studies for treatment of PAH associated with systemic sclerosis; |
| ● | Tacrolimus, an immunosuppressive drug used in organ transplantation, is currently being developed by Vivus, Inc. for treatment of PAH, with a phase II study being planned; |
| ● | CAM2043, a liquid crystal gel formulation of treprostinil being developed as a once-weekly subcutaneous depot injection for PAH by Camurus AB. Camurus announced the positive results from a phase I clinical study in May 2018; |
| ● | INS1009, an inhaled nanoparticle formulation of a treprostinil prodrug being developed by Insmed Incorporated for PAH. Insmed announced the completion of a phase I study in September 2016; |
| ● | TIVUS™, an ultrasound catheter system being developed by SoniVie for treatment of denervation associated with PAH, which is undergoing a phase I trial in PAH patients; |
| ● | ABI-009, an albumin-bound mTOR inhibitor being developed by Aadi Bioscience, Inc. for PAH and other indications, which is currently the subject of a phase I clinical study in PAH patients; |
| ● | GB004, a PGDF receptor kinase inhibitor being developed by Gossamer Bio, Inc. to treat PAH, which is currently the subject of phase I clinical studies; and |
| ● | L606, an inhaled, liposomal form of treprostinil being developed by Pharmosa Biopharm Inc. for PAH, which completed a phase I study in healthy volunteers. |
26
Oral non-prostacyclin therapies (such as PDE-5 inhibitors and ETRAs) are commonly prescribed as first-line treatments for the least severely ill PAH patients (functional class II patients). As patients progress in their disease severity (functional classes III and IV), less convenient approved therapies, such as inhaled prostacyclin analogues (such as Tyvaso) or infused prostacyclin analogues (such as Remodulin) are commonly added. Orenitram was the first approved oral prostacyclin-class therapy for PAH in the United States, and offers a less invasive and more convenient alternative therapy to Remodulin and Tyvaso. The use of available oral therapies could delay many patients’ need for inhaled or infused prostacyclin therapy. As a result, the availability of oral therapies affects demand for our inhaled and infused products.
Orenitram faces direct competition from Uptravi, which is indicated to delay disease progression and reduce the risk of hospitalization for PAH. Orenitram’s initial indication was limited to the improvement of exercise capacity, which may have led physicians to prescribe Uptravi instead of Orenitram. As noted above, however, Uptravi is an oral IP prostacyclin receptor agonist. While prostacyclin analogues such as Orenitram broadly mimic the effect of prostacyclin, IP prostacyclin receptor agonists bind selectively to the IP receptor, one of several prostacyclin receptors. In addition, Orenitram’s label allows physicians flexibility to titrate each patient’s dosing up to a level according to tolerability, without any stated maximum. By contrast, Uptravi’s label limits uptitration to a specific maximum dose. Given the progressive nature of PAH, we believe many patients will initiate Orenitram or another one of our treprostinil-based therapies after their disease progresses on Uptravi. In August 2018, we announced the results of our FREEDOM-EV clinical study, which demonstrated that Orenitram delays time to clinical worsening, demonstrated improvement across key clinical measures, and, at study closure, indicated a positive impact on survival rates. In October 2019, the FDA approved a supplement to our Orenitram NDA expanding the Orenitram label to indicate that it also delays disease progression, in addition to improving exercise capacity. We believe these clinical results and updated labeling will result in increased use of Orenitram.
We have faced generic competition for Adcirca since the launch of generic tadalafil in the U.S. in August 2018, which has significantly reduced our Adcirca revenues. We have also faced generic competition for Remodulin in the U.S. and certain European countries since 2019. Finally, we have entered into settlement agreements with Actavis and Watson, permitting them to launch generic versions of Orenitram and Tyvaso in June 2027 and January 2026, respectively, or earlier under certain circumstances. For details regarding these and other potential generic competitors, see the section above entitled Patents and Other Proprietary Rights, Strategic Licenses and Market Exclusivity–Generic Competition.
Tyvaso may face competition from Liquidia if it obtains approval of LIQ861, a dry powder inhaled version of treprostinil. In addition, we expect Liquidia’s product would compete directly with Treprostinil Technosphere, if approved.
If Tyvaso is ultimately approved to treat WHO Group 3 pulmonary hypertension as a result of the INCREASE and/or PERFECT studies, it may face competition from Bellerophon Therapeutics, Inc., which announced in February 2020 positive top-line results of a phase II/III study of INOpulse® for patients with pulmonary hypertension associated with pulmonary fibrosis.
Unituxin may face competition from Qarziba® (dinutuximab beta), an antibody product developed by Apeiron Biologics AG that is already approved in Europe to treat high-risk neuroblastoma. In October 2016, EUSA Pharma (UK) Ltd. announced it had acquired global commercialization rights to Qarziba, and plans to file for FDA approval. In addition, Y-mAbs Therapeutics, Inc. (Y-mAbs), is developing several GD-2 targeting drug candidates, including an antibody called naxitamab which is undergoing a pivotal phase II trial for relapsed and refractory (second-line) high-risk neuroblastoma, and has received breakthrough therapy designation from the FDA. Y-mAbs’ rolling BLA submission for naxitamab was initiated in November 2019, with a goal of obtaining FDA approval in 2020. Y-mAbs is also conducting studies of naxitamab for frontline high-risk neuroblastoma.
27
We compete with the developers, manufacturers and distributors of all of the products noted above for customers, funding, access to licenses, personnel, third-party collaborators, product development and commercialization. Many of these companies have substantially greater financial, marketing, sales, distribution and technical resources, and more experience in research and development, product development, manufacturing and marketing, clinical trials and regulatory matters, than we have.
Governmental Regulation
Pharmaceutical Product Approval Process
The research, development, testing, manufacture, promotion, marketing, distribution, sampling, storage, approval, labeling, record keeping, post-approval monitoring and reporting, and import and export of pharmaceutical products are extensively regulated by governmental agencies in the United States and in other countries. In the United States, failure to comply with requirements under the Federal Food, Drug, and Cosmetic Act (FDC Act), the Public Health Service Act (PHSA), and other federal statutes and regulations, may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending NDAs or BLAs, warning letters, product recalls, product seizures, total or partial suspension of manufacturing or distribution, injunctions, fines, civil penalties, and criminal prosecution.
Satisfaction of FDA pre-market approval requirements is extremely costly and typically takes many years. The actual cost and time required may vary substantially based upon the type, complexity and novelty of the product or disease. Drugs are subject to rigorous regulation by the FDA in the United States, the EMA in the EU and similar regulatory authorities in other countries. The steps ordinarily required before a new drug may be marketed in the United States, which are similar to steps required in most other countries, include: (1) preclinical testing; (2) submission to the FDA of an IND; (3) clinical studies, including well-controlled clinical trials, in healthy volunteers and patients to establish safety, efficacy and dose-response characteristics for each drug indication; (4) submission of an NDA to the FDA; and (5) FDA review and approval of the NDA.
Preclinical Testing
Preclinical tests include laboratory evaluation of product chemistry and formulation, as well as animal studies to explore toxicity and for proof-of-concept. The conduct of the preclinical tests must comply with federal regulations and requirements including good laboratory practices.
Submission of IND
The results of preclinical testing are submitted to the FDA as part of an IND, along with other information including information about product chemistry, manufacturing and controls and a proposed clinical trial protocol. Absent FDA objection within 30 days after submission of an IND, the IND becomes effective and the clinical trial proposed in the IND may begin.
Clinical Studies
Clinical trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted: (1) in compliance with federal regulations; (2) in compliance with good clinical practices (GCP), an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators, and monitors; and (3) under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.
28
The FDA may order the temporary or permanent discontinuation of a clinical trial at any time or impose other sanctions if it believes that the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The study protocol and informed consent information for patients in clinical trials must also be approved by an institutional review board (IRB). An IRB may also require the clinical trial at a site to be halted temporarily or permanently for failure to comply with the IRB’s requirements, or may impose other conditions.
Clinical trials in support of an NDA typically are conducted in sequential phases, but the phases may overlap.
| ● | Phase I involves the initial introduction of the drug into healthy human subjects or patients to assess metabolism, pharmacokinetics, pharmacological actions, side effects associated with increasing doses, and, if possible, early evidence on effectiveness. |
| ● | Phase II usually involves studies in a limited patient population to assess the efficacy of the drug in specific, targeted indications, explore tolerance and optimal dosage, and identify possible adverse effects and safety risks. |
| ● | Phase III trials, also called pivotal studies, major studies or advanced clinical trials, demonstrate clinical efficacy and safety in a larger number of patients, typically at geographically diverse clinical study sites, and permit the FDA to evaluate the overall benefit-risk relationship of the drug and provide adequate information for drug labeling. |
| ● | Phase IV studies are often conducted following marketing approval, in order to meet regulatory requirements or to provide additional data related to drug use. |
FDA Approval Process
After successful completion of the required clinical testing, an NDA is typically submitted to the FDA in the United States, and a marketing authorization application (MAA) is typically submitted to the EMA in the EU. FDA approval of the NDA is required before the product may be marketed in the United States. The NDA must include the results of all preclinical, clinical and other testing and a compilation of data related to the product’s pharmacology, chemistry, manufacture, and controls.
The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing. If the FDA determines that the application is not sufficiently complete to permit substantive review, it may request additional information and decline to accept the application for filing until the information is provided. Once the submission is accepted for filing, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of NDAs. Most applications for non-priority drugs are reviewed within ten to twelve months. Special pathways, including “accelerated approval,” “fast track” status, “breakthrough therapy” status and “priority review” status are granted for certain drugs that offer major advances in treatment, or provide a treatment where no adequate therapy exists. These special pathways can significantly reduce the time it takes for the FDA to review an NDA, but do not guarantee that a product will receive FDA approval. In May 2018, the Right to Try Act established a new regulatory pathway to increase access to unapproved, investigational treatments for patients diagnosed with life-threatening diseases or conditions who have exhausted approved treatment options and who are unable to participate in a clinical trial.
29
The FDA may refer applications for novel pharmaceutical products or pharmaceutical products that present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. During the review process, the FDA also reviews the drug’s product labeling to ensure that appropriate information is communicated to health care professionals and consumers. In addition, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP and the facility or the facilities at which the drug is manufactured to ensure they are in compliance with the FDA’s current Good Manufacturing Practices (cGMP).
After the FDA evaluates the NDA and the manufacturing facilities, the FDA may issue either an approval letter or a complete response letter, which generally outlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. If and when those conditions have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included. Even after a resubmission, the FDA may decide that the application does not satisfy the regulatory criteria for approval.
Post-Approval Regulatory Requirements
Once an NDA is approved, the product is subject to continuing regulation. For instance, pharmaceutical products may be marketed only for their approved indications and in accordance with the provisions of their approved labeling. The FDA closely regulates the post-approval marketing, labeling and advertising of prescription drugs, including direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet.
Adverse event reporting and submission of periodic reports continue to be required following FDA approval of an NDA. In addition, as a condition of NDA approval, the FDA may require post-marketing testing, including phase IV clinical studies, and/or a risk evaluation and mitigation strategy (REMS) to help ensure that the benefits of the drug outweigh the potential risks. A REMS can include medication guides, communication plans for healthcare professionals, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries. Additionally, quality control as well as drug manufacture, packaging, and labeling procedures must continue to conform to cGMP requirements. Manufacturing facilities are subject to continual review and periodic inspections by the FDA and certain state agencies.
Regulatory authorities may withdraw product approvals or request product recalls if a company fails to comply with regulatory standards or if previously unrecognized problems are subsequently discovered. Discovery of previously unknown problems with a product, including adverse events or problems with manufacturing processes of unanticipated severity or frequency, or failure to comply with regulatory requirements, may also result in (1) revisions to the approved labeling; (2) imposition of post-market studies or clinical trials to assess new safety risks; or (3) imposition of distribution or other restrictions under a REMS program. Other potential consequences include: (1) restrictions on the marketing or manufacturing of the product; (2) fines, warning letters or holds on post-approval clinical trials; (3) refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product license approvals; (4) product seizure or detention, or refusal to permit the import or export of products; or (5) injunctions or the imposition of civil or criminal penalties.
30
Approval of Changes to an Approved Product
Certain changes to the conditions established in an approved application, including changes in indications, labeling, equipment, or manufacturing processes or facilities, require submission and FDA approval of an NDA or NDA supplement before the change can be implemented. An NDA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing supplements as it does in reviewing NDAs.
Orphan Drugs
Under the Orphan Drug Act, an applicant can request the FDA to designate a product as an “orphan drug” in the United States if the drug is intended to treat a rare disease or condition affecting fewer than 200,000 people in the United States. Orphan drug designation must be requested before submitting an NDA or BLA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. The first NDA or BLA applicant to receive orphan drug designation and FDA approval for a particular active ingredient to treat a particular disease via a particular delivery method is entitled to a seven-year exclusive marketing period in the United States. During the seven-year period, the FDA may not approve any other application to market the same drug for the same disease, except in limited circumstances such as a showing of clinical superiority to the product with orphan drug exclusivity, meaning that it has greater effectiveness or safety, or provides a major contribution to patient care (such as a change in delivery system). Orphan drug exclusivity does not prevent the FDA from approving a different drug for the same disease or condition, or the same drug for a different disease or condition. The 21st Century Cures Act (Cures Act), which became law in December 2016, expanded the types of studies that qualify for orphan drug grants. Orphan drug designation also may qualify an applicant for federal tax credits related to research and development costs.
Patent Term and Regulatory Exclusivity
In 1984, the Hatch-Waxman Act created a faster approval process for generic drugs, called the ANDA. Generally, an ANDA provides for marketing of a drug product that has the same active ingredients in the same strength(s), route of administration, and dosage form as an approved drug and has been shown through bioequivalence testing to be therapeutically equivalent to the approved drug. ANDA applicants are not required to conduct or submit results of preclinical or clinical tests to prove the safety or effectiveness of their drug product, other than the requirement for bioequivalence testing. Drugs approved in this way are commonly referred to as “generic equivalents” to the approved drug, and can often be substituted by pharmacists under prescriptions written for the original approved drug. In 2018, the FDA advanced policies aimed at promoting drug competition and patient access to generic drugs, such as issuing guidance about making complex generic drugs and the circumstances in which approval of a generic product application may be delayed.
NDA applicants are required to identify each patent whose claims cover the product or FDA-approved method of using the product. Upon product approval, these patents are listed in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Every ANDA applicant must certify to the FDA that (1) the required information for the original product was not filed; or (2) every patent listed for the approved product in the Orange Book is either (a) expired or will expire on a particular date and approval is sought after patent expiration; or (b) invalid or will not be infringed by the new product. A certification that the new product will not infringe the already approved product’s listed patents or that such patents are invalid is called a Paragraph IV certification. If the applicant does not challenge the listed patents, the ANDA application will not be approved until all the listed patents claiming the referenced product have expired. Alternatively, for a patent covering an approved indication, an ANDA applicant may submit a statement to the FDA that the company is not seeking approval for the covered indication.
31
If the ANDA applicant has submitted a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit or a decision in the infringement case that is favorable to the ANDA applicant.
The Hatch-Waxman Act also provides that patent terms may be extended to compensate for some of the patent life that is lost during the FDA regulatory review period for a product. This extension period is generally one-half of the time between the effective date of an IND and the submission date of an NDA, plus all of the time between the submission date of an NDA and its approval, subject to a maximum extension of five years. Similar patent term extensions are available under European laws.
An ANDA application also will not be approved until any non-patent exclusivity, such as exclusivity for obtaining approval of an NDA for a new chemical entity, has expired. Federal law provides a period of five years following approval of a drug containing no previously approved active ingredient, during which ANDAs for generic versions of those drugs cannot be submitted unless the submission contains a Paragraph IV certification, in which case the submission may be made four years following the original product approval. Following approval of an application to market a drug that contains previously approved active ingredients in a new dosage form, route of administration or combination, or for a new condition of use that was required to be supported by new clinical trials conducted by or for the sponsor, the FDC Act provides three years of exclusivity during which the FDA cannot grant effective approval of an ANDA for such new condition of use, dosage form or strength that meets certain statutory requirements.
Section 505(b)(2) New Drug Applications
Most drug products (other than biological products) obtain FDA marketing approval pursuant to an NDA submitted under Section 505(b)(1) of the FDC Act, or an ANDA. A third alternative is a special type of NDA submitted under Section 505(b)(2) of the FDC Act, commonly referred to as a Section 505(b)(2) NDA, which enables the applicant to rely, in part, on the FDA’s finding of safety and efficacy data for an existing product, or published literature, in support of its application.
Section 505(b)(2) NDAs may provide an alternate path to FDA approval for new or improved formulations or new uses of previously approved products. Section 505(b)(2) permits the filing of an NDA in which the applicant relies, at least in part, on information from studies made to show whether a drug is safe or effective that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use. A Section 505(b)(2) applicant may eliminate the need to conduct certain preclinical or clinical studies, if it can establish that reliance on studies conducted for a previously-approved product is scientifically appropriate. The FDA may also require companies to perform additional studies or measurements to support the change from the approved product. The FDA may then approve the new product candidate for all or some of the labeled indications for which the referenced product has been approved, as well as for any new indication for which the Section 505(b)(2) NDA applicant has submitted data.
To the extent that the Section 505(b)(2) applicant relies on prior FDA findings of safety and efficacy, the applicant is required to certify to the FDA concerning any patents listed for the previously approved product in the Orange Book to the same extent that an ANDA applicant would. Thus, approval of a Section 505(b)(2) NDA can be delayed until all the listed patents claiming the referenced product have expired, until any non-patent exclusivity, such as exclusivity for obtaining approval of a new active ingredient, listed in the Orange Book for the referenced product has expired, and, in the case of a Paragraph IV certification and subsequent patent infringement suit, until the earlier of 30 months, settlement of the lawsuit or a decision in the infringement case that is favorable to the Section 505(b)(2) applicant.
32
Marketing Pharmaceutical Products Outside the United States
Outside of the United States, our ability to market our products is also contingent upon receiving marketing authorizations from regulatory authorities. The foreign regulatory approval process may include some or all of the risks associated with the FDA review and approval process set forth above, and the requirements governing the conduct of clinical trials and marketing authorization vary widely from country to country.
Biologics
Biological products used for the prevention, treatment, or cure of a disease, or condition, of a human being are subject to regulation under the FDC Act and the PHSA. Biological products are approved for marketing via a BLA that follows an application process and carries approval requirements that are very similar to those for NDAs. To help reduce the increased risk of the introduction of adventitious agents, the PHSA emphasizes the importance of manufacturing control for products whose attributes cannot be precisely defined. The PHSA also provides authority to the FDA to immediately suspend licenses in situations where there is a danger to public health, to prepare or procure products in the event of shortages and critical public health needs, and to authorize the creation and enforcement of regulations to prevent the introduction, or spread, of communicable diseases in the United States.
After a BLA is approved, the product may also be subject to official lot release, meaning the manufacturer must submit samples of each lot of product to the FDA together with a release protocol showing a summary of the history of manufacture of the lot and the results of all of the manufacturer’s tests performed on the lot. The FDA may also perform certain confirmatory tests on lots of some products, such as viral vaccines, before releasing the lots for distribution by the manufacturer. As with drugs, after approval of biologics, manufacturers must address any safety issues that arise, are subject to recalls or a halt in manufacturing, and are subject to periodic inspection after approval.
The Biologics Price Competition and Innovation Act of 2009, or BPCI Act, created an abbreviated approval pathway for biological products shown to be “biosimilar” to an FDA-licensed reference biological product to minimize duplicative testing. Biosimilarity requires the absence of clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency, which, absent a waiver, must be shown through analytical studies, animal studies, and at least one clinical study. Intricacies associated with the larger, and often more complex, structures of biological products, as well as the processes by which such products are manufactured, pose significant hurdles to implementation that are still being addressed by the FDA. In July 2018, the FDA announced an action plan to encourage the development and efficient review of biosimilars, including the establishment of a new office within the agency that will focus on therapeutic biologics and biosimilars.
A reference biologic is granted twelve years of exclusivity from the time of first licensure of the reference product. The first biologic product submitted under the abbreviated approval pathway that is approved as a biosimilar and also meets additional standards for interchangeability with the reference product, has exclusivity against other biologics submitted under the abbreviated approval pathway for a set period. Starting in March 2020, certain products currently approved as drugs under the FDC Act, such as insulin and human growth hormone, will be deemed to be biologics under the PHSA, which means they may face competition through the biosimilars pathway and they will not be eligible for the twelve-year period of exclusivity granted to new BLAs.
Because biologically sourced raw materials are subject to unique contamination risks, their use may be restricted in some countries.
33
Cell-Based and Tissue-Based Products
Manufacturers of cell- and tissue-based products must comply with the FDA’s current good tissue practices (cGTP), which are FDA regulations that govern the methods used in, and the facilities and controls used for, the manufacture of such products. The primary intent of the cGTP requirements is to ensure that cell and tissue-based products are manufactured in a manner designed to prevent the introduction, transmission and spread of communicable diseases. Cell and tissue-based products may also be subject to the same approval standards, including demonstration of safety and efficacy, as other biologic and drug products, if they meet certain criteria such as if the cells or tissues are more than minimally manipulated or if they are intended for a non-homologous use (a use different from the cell’s origin).
The Cures Act established a new FDA Office of Tissues and Advanced Therapies and Regenerative Advanced Therapy (RAT) designation, which makes a product eligible for FDA priority review and accelerated approval. Therapies that are eligible for RAT designation include cell therapies, therapeutic tissue engineering products, human cell and tissue products, or any combination product using these therapies, with certain exceptions. For RAT designation, the product also must be intended to treat, modify, reverse, or cure a serious or life-threatening disease or condition, and the preliminary clinical evidence must indicate that the product has the potential to address unmet medical needs for the disease or condition.
U.S. Regulation of Medical Devices
Medical devices may also be subject to FDA approval and extensive regulation under the FDC Act. Medical devices are classified into one of three classes: Class I, Class II, or Class III. A higher class indicates a greater degree of risk associated with the device and a greater amount of control needed to ensure safety and effectiveness.
All devices, unless exempt by FDA regulation, must adhere to a set of general controls, including compliance with the applicable portions of the FDA’s Quality System Regulation (QSR), which sets forth good manufacturing practice requirements; facility registration and product listing; reporting of adverse medical events; truthful and non-misleading labeling; and promotion of the device consistent with its cleared or approved intended uses. Class II and III devices are subject to additional special controls and may require FDA clearance of a premarket notification (510(k)) or approval of a premarket approval application.
Most Class I devices are exempt from FDA premarket review or approval. Class II devices, with some exceptions, must be “cleared” by the FDA through the 510(k) process, which requires a company to show that the device is “substantially equivalent” to certain “predicate” devices already on the market. In November 2018, the FDA announced plans to significantly revise the 510(k) program to encourage reliance on modern predicates (e.g., predicates that are less than 10 years old). In January 2019, the FDA also finalized guidance on the alternative 510(k) pathway for well-known device types, the “Safety and Performance Based Pathway,” which relies on modern performance-based criteria and current technological principles to demonstrate substantial equivalence. Class III devices, again with some exceptions, must be approved through a PMA. A PMA generally requires data from clinical trials that establish the safety and effectiveness of the device. In 2019, the FDA issued several guidance documents aimed at streamlining the approval process for a PMA, but the effect of those new initiatives is not yet known. A 510(k) application also sometimes requires clinical data.
The Cures Act requires the FDA to establish a program that would expedite access to devices that provide more effective treatment or diagnosis of life-threatening or irreversibly debilitating diseases or conditions, for which no approved or cleared treatment exists or which offer significant advantages over existing approved or cleared alternatives. In December 2018, the FDA published final guidance on this “breakthrough” devices pathway and announced plans to establish the Safer Technologies Program to encourage the innovation and market entry of device technologies that are safer than current alternatives but that do not otherwise satisfy the breakthrough device criteria.
34
Clinical trials for medical devices are subject to similar requirements as clinical trials with respect to drugs or biologics. Clinical trials involving significant risk devices (e.g., devices that present a potential for serious risk to the health, safety, or welfare of human subjects) are required to obtain both FDA approval of an investigational device exemption (IDE) application and IRB approval before study initiation. Clinical trials involving non-significant risk devices are not required to submit an IDE for FDA approval but must obtain IRB approval before study initiation.
The FDA has broad regulatory and enforcement powers with respect to medical devices, similar to those for drugs and biologics. The FDA requires medical device manufacturers to comply with detailed requirements regarding the design and manufacturing practices, labeling and promotion, record keeping, and adverse event reporting.
States also impose regulatory requirements on medical device manufacturers and distributors. Failure to comply with the applicable federal or state requirements could result in, among other things: (1) fines, injunctions, and civil penalties; (2) recall or seizure of products; (3) operating restrictions, partial suspension or total shutdown of manufacturing; (4) refusing requests for approval of new products; (5) withdrawing approvals already granted; and (6) criminal prosecution.
The FDA also administers certain controls over the import and export of medical devices to and from the United States. Additionally, each foreign country subjects medical devices to its own regulatory requirements. In the EU, a single regulatory approval process has been created, and approval is represented by the CE Mark.
Combination Products
A combination product is a product composed of a combination of two or more FDA-regulated product components or products, e.g., drug-device or device-biologic. A combination product can take a variety of forms, such as a single entity made by physically or chemically combining components, or a single unit made of separately packaged products. Each combination product is assigned a lead FDA Center, which has jurisdiction for the premarket review and regulation, based on which constituent part of the combination product provides the primary mode of action, i.e., the mode of action expected to make the greatest contribution to the overall intended therapeutic effect of the product. If the classification as a combination product or the lead Center assignment is unclear or in dispute, a sponsor may request a meeting, submit a Request for Designation (RFD), and the FDA will issue a designation letter within 60 calendar days of the filing of the RFD. Depending on the type of combination product, the FDA may require a single application for approval, clearance, or licensure of the combination product, or separate applications for the constituent parts. During the review of marketing applications, the lead Center may consult or collaborate with other FDA Centers. In 2017, the FDA released final documents addressing the application of cGMP requirements and classification issues related to combination products.
The Cures Act sets forth a number of provisions pertaining to combination products, such as procedures for negotiating disagreements between sponsors and FDA and requirements intended to streamline FDA premarket reviews of combination products that contain an already-approved component. For drug-device combination products, comprised of an FDA-approved drug and device primary mode of action, the Cures Act applies Hatch Waxman requirements to the premarket review process such that a patent dispute regarding the listed drug may result in the delay of the 510(k) clearance or PMA approval of the combination product. Furthermore, the Cures Act applies exclusivity provisions (e.g., new chemical entity and orphan drug exclusivities) to the device clearance and approval process for combination products with a device primary mode of action.
35
Government Reimbursement of Pharmaceutical Products
In the United States, many independent third-party health plans, and government health care programs, pay for patient use of our commercial products. Medicare is the federal program that provides health care benefits to senior citizens and certain disabled and chronically ill persons. Medicaid is the federal program jointly funded and administered by the states to provide health care benefits to participants who qualify based on income or other requirements. Unituxin is administered entirely as an in-patient therapy and would typically be reimbursed under Medicare Part A, which covers inpatient hospital benefits. However, because Unituxin is indicated for the treatment of a pediatric cancer, Medicare is unlikely to cover treatment, but Medicaid programs may cover pediatric patients requiring care. Remodulin and Tyvaso are reimbursed by the Medicare Part B Durable Medical Equipment benefit, which covers physician services and outpatient care. The Medicare Part B contractors who administer the program provide reimbursement for Remodulin and Tyvaso according to statutory guidelines. We pay rebates to sponsors that reimburse Medicare Part D products (Adcirca and Orenitram) as part of the Medicare Part D program, a voluntary outpatient prescription drug benefit to Medicare beneficiaries. State Medicaid programs also reimburse the cost of our commercial products at rates established by statutory guidelines. Because Remodulin, Tyvaso, Adcirca, Orenitram and Unituxin are reimbursed by state Medicaid programs, we must pay rebates on our products to those state Medicaid programs. Additionally, as a condition to our products being reimbursed under Medicaid, we are required by law to sell our commercial products under contracts with the Department of Veterans Affairs, Department of Defense, Public Health Service and numerous other federal agencies as well as certain hospitals that are designated as 340B covered entities (entities designated by federal programs to receive drugs at discounted prices) at prices that are below the price we charge to our specialty distributors. These programs and contracts are highly regulated, are subject to regulatory changes and amendments that we cannot control, and impose restrictions on our business. Failure to comply with these regulations and restrictions could result in our drugs no longer being reimbursed, exclusion of our products from coverage under federal healthcare programs, or debarment, and expose us to liability under federal and state false claims laws. The availability of adequate government reimbursement for our products may also be subject to regulatory changes and controls. We estimate that between 40-60 percent of Remodulin, Tyvaso, Adcirca and Orenitram sales are reimbursed under the Medicare and Medicaid programs.
Anti-Kickback, False Claims Laws and The Prescription Drug Marketing Act
The federal Anti-Kickback Statute (AKS) prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce or in return for purchasing, leasing, ordering or arranging for the purchase, lease or order of, or referring an individual for the furnishing of, any healthcare item or service reimbursable under Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted broadly to apply to arrangements between pharmaceutical manufacturers and prescribers, purchasers, formulary managers and others. The term “remuneration” has been broadly interpreted to apply to anything of value including, for example, gifts, cash payments, donations, waivers of payment, ownership interests, and providing any item, service, or compensation for something other than fair market value. Violations of the AKS are punishable by imprisonment, criminal fines, civil monetary penalties, exclusion from participation in federal healthcare programs and liability under the False Claims Act (FCA).
36
The FCA prohibits any person from, among other things, presenting, or causing to be presented, a false or fraudulent claim for payment to the federal government, or making, or causing to be made, a false statement material to a false or fraudulent claim. Many pharmaceutical and other healthcare companies have been prosecuted under the FCA for allegedly inflating drug prices they report to pricing services, which in turn were used by the government to set Medicare and Medicaid reimbursement rates; for allegedly providing free product to customers with the expectation that the customers would bill federal programs for the product; for violating the AKS; for materially deviating from statutorily required manufacturing standards; and on the basis of allegations related to certain marketing practices, including off-label promotion. Many states also have statutes or regulations similar to the AKS and the FCA, which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payer. Sanctions under these federal and state laws may include treble damages, civil penalties, exclusion of a manufacturer’s products from reimbursement under government programs, criminal fines, and imprisonment.
We are also subject to numerous other anti-bribery and anti-fraud laws, including the U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and the federal Civil Monetary Penalties Law.
As part of the sales and marketing process, pharmaceutical companies frequently provide samples of approved drugs to physicians. The Prescription Drug Marketing Act (PDMA) imposes requirements and limitations upon the distribution of drugs and drug samples, and prohibits states from licensing distributors of prescription drugs unless the state licensing program meets certain federal guidelines that include minimum standards for storage and handling, as well as record keeping requirements for information regarding sample requests and distribution. The PDMA sets forth civil and criminal penalties for violations. In addition, PDMA requires manufacturers and distributors to submit similar drug sample information to the FDA.
The Patient Protection and Affordable Care Act of 2010 (PPACA)
The PPACA is intended to expand healthcare coverage within the United States. Several provisions of the law, which have varying effective dates, have impacted us and have increased certain of our costs. The PPACA imposes an annual fee on pharmaceutical manufacturers, based on the manufacturer’s sale of branded pharmaceuticals and biologics (excluding orphan drugs) to certain U.S. government programs during the preceding year; expands the 340B drug discount program (excluding orphan drugs) including the creation of new penalties for non-compliance; includes a 50 percent discount on brand name drugs for Medicare Part D participants in the coverage gap, or “donut hole”; and revised the definition of “average manufacturer price” for reporting purposes, which could increase the amount of the Medicaid drug rebates paid to states.
In addition, the PPACA imposes new annual reporting requirements for pharmaceutical, biological and device manufacturers with regard to payments or other transfers of value made to physicians and teaching hospitals. In addition, pharmaceutical, biological and device manufacturers are required to report annually investment interests held by physicians and their immediate family members during the preceding calendar year. Many of these laws and regulations contain ambiguous requirements that have not yet been clarified. Further, the PPACA amends the intent requirement of the AKS and the federal criminal health care fraud statute. A person or entity no longer needs to have actual knowledge of these statutes or specific intent to violate them. In addition, the government may assert that a claim including items or services resulting from a violation of the federal anti-kickback statute constitutes a false or fraudulent claim for purposes of the False Claims Act.
In December 2017, Congress repealed a PPACA requirement that individuals obtain healthcare insurance coverage or face a penalty, which could decrease the number of patients who have coverage under health plans that pay for patient use of our products.
37
21st Century Cures Act
The Cures Act, which was signed into law on December 13, 2016, contains a wide range of provisions designed to promote clinical research and streamline and expedite the FDA review and approval process. For example, the law clarifies the FDA’s authority regarding drugs that target rare diseases, and broadens the type of data and information that may be used to support a drug or biologic application for a genetically targeted drug or variant protein targeted drug. The law requires the FDA to facilitate development programs for, and provides expedited review of, regenerative advanced therapies. The law further requires the FDA to establish a program to evaluate the use of real-world evidence, i.e., evidence from sources other than randomized clinical trials, to support the approval of certain drug and biological product applications and to satisfy post-approval requirements; in 2018, the FDA published a framework for evaluating real-world evidence. In 2019, the FDA announced numerous initiatives and guidance documents intended to improve and streamline the drug approval process. The effects of these initiatives, which are still being implemented and announced, are not yet known. Other key provisions related to orphan drugs, combination products, and medical devices, are discussed separately above.
State Pharmaceutical and Medical Device Marketing Laws
If not preempted by the PPACA, several jurisdictions require pharmaceutical companies to report expenses related to the marketing and promotion of pharmaceutical products and to report gifts and payments to healthcare practitioners in those jurisdictions, or to obtain licenses for sales representatives and require them to satisfy educational and other requirements. Some of these jurisdictions also prohibit various marketing related activities. Still other states require the disclosure of information related to drug pricing and clinical studies and their outcomes. In addition, certain states require pharmaceutical companies to implement compliance programs or marketing codes and several other states are considering similar proposals. Compliance with these laws is difficult and time consuming, and companies that do not comply with these state laws face civil penalties or other civil enforcement action.
Other Laws and Regulations
Numerous other statutory and regulatory regimes affect our business and operations. For example, our research and development efforts may be subject to laws, regulations and recommendations related to data privacy and protection, safe working conditions, laboratory practices, use of animals in research and development activities, and the purchase, storage, movement, import, export and use and disposal of hazardous or potentially hazardous substances. Antitrust and competition laws may restrict our ability to enter into certain agreements involving exclusive license rights. Future legislation and administrative action will continue to affect our business, the extent and degree of which we cannot accurately predict.
38
Environmental Matters
We are subject to a number of laws and regulations that require compliance with federal, state, and local regulations for the protection of the environment. We believe that our operations comply in all material respects with such applicable laws and regulations. Our compliance with these requirements did not change during the past year, and is not expected to have a material effect upon our capital expenditures, cash flows, earnings or competitive position.
Employees
We had approximately 920 employees as of December 31, 2019. The success of our business is highly dependent on attracting and retaining highly talented and qualified personnel.
Corporate Website
Our Internet website address is http://www.unither.com. Our filings on Form 10-K, Form 10-Q, Form 3, Form 4, Form 5, Form 8-K and any and all amendments thereto are available free of charge through this Internet website as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission (SEC). They are also available through the SEC at http://www.sec.gov/edgar/searchedgar/companysearch.html.
39
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following is a list, as of February 26, 2020, setting forth certain information regarding our executive officers. Each executive officer holds office until the first meeting of the Board of Directors after the annual meeting of shareholders, and until his or her successor is elected and qualified or until his or her earlier resignation or removal. Each executive officer’s employment will end pursuant to the terms of his or her employment contract.
Name |
| Age |
| Position |
Martine A. Rothblatt, Ph.D., J.D., M.B.A. | 65 | Chairman, Chief Executive Officer and Director | ||
Michael Benkowitz |
| 48 |
| President and Chief Operating Officer |
James C. Edgemond |
| 52 |
| Chief Financial Officer and Treasurer |
Paul A. Mahon, J.D. |
| 56 |
| Executive Vice President, General Counsel and Corporate Secretary |
Martine A. Rothblatt, Ph.D., J.D., M.B.A., founded United Therapeutics in 1996 and served as Chairman and Chief Executive Officer since its inception through January 2015, when she became Chairman and Co-Chief Executive Officer. She was promoted to her current role as Chairman and soul CEO in June 2016. Prior to founding United Therapeutics, she created several satellite communications technologies, including satellite radio and satellite vehicle positioning. She is a co-inventor on six of our patents pertaining to treprostinil, and the inventor of our recently-awarded patent on a brain-computer interface device for patients with debilitating cognitive conditions. In 2014, Dr. Rothblatt was appointed to the Committee of Science, Technology and Law of the National Research Council.
Michael Benkowitz joined United Therapeutics in 2011 as our Executive Vice President, Organizational Development. In this role, he was responsible for most companywide administrative functions, including human resources, information technology, corporate real estate and risk management, and was also responsible for many of our business development efforts and oversight of several of our key collaborations. He was promoted to President and Chief Operating Officer in June 2016, when he also became responsible for all of our commercial and medical affairs activities.
James C. Edgemond joined United Therapeutics in January 2013 as Treasurer and Vice President, Strategic Financial Planning. Mr. Edgemond was promoted to Chief Financial Officer and Treasurer in March 2015. Prior to joining United Therapeutics, he was Vice President, Corporate Controller and Treasurer of Clark Construction Group from 2008 through January 2013. He also served in a variety of roles at The Corporate Executive Board Company from 1998 to 2008, serving as Executive Director, Finance from 2005 to 2008. He began his career as a public accountant at KPMG Peat Marwick LLP, from 1990 through 1998, where he served in a variety of roles, including as a Senior Manager prior to his departure.
Paul A. Mahon, J.D., has served as General Counsel and Corporate Secretary of United Therapeutics since its inception in 1996. In 2001, Mr. Mahon joined United Therapeutics full-time as Senior Vice President, General Counsel and Corporate Secretary. In 2003, Mr. Mahon was promoted to Executive Vice President, General Counsel and Corporate Secretary. Prior to 2001, he served United Therapeutics, beginning with its formation in 1996, in his capacity as principal and managing partner of a law firm specializing in technology and media law.
40
ITEM 1A. RISK FACTORS
Forward-Looking Statements
This Report 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. These statements, which are based on our beliefs and expectations as to future outcomes, include, among others, statements related to the following:
| ● | Expectations of revenues, expenses, profitability, and cash flows, including our expectation that 2020 revenue will grow compared to 2019, and that our pipeline will drive further revenue growth thereafter; |
| ● | The sufficiency of current and future working capital to support operations; |
| ● | Our ability to obtain financing on terms favorable to us or at all; |
| ● | The maintenance of domestic and international regulatory approvals; |
| ● | Our ability to maintain attractive pricing for our products, in light of increasing competition, including from generic products and pressure from government and other payers to decrease the costs associated with healthcare; |
| ● | The expected volume and timing of sales of Remodulin, Tyvaso, Orenitram and Unituxin, as well as potential future commercial products, including the anticipated effect of various research and development efforts on sales of these products; |
| ● | The timing and outcome of clinical studies, other research and development efforts, and related regulatory filings and approvals; |
| ● | The potential timing and success of our anticipated launch of Remunity, Trevyent and the Implantable System for Remodulin; |
| ● | The timing and outcome of our anticipated supplemental NDA for Tyvaso to reflect the INCREASE study results; |
| ● | The outcome of pending and potential future legal and regulatory actions by the FDA and other regulatory and government enforcement agencies, and the anticipated duration of regulatory exclusivity for our products; |
| ● | The timing and outcome of the lawsuit filed against us by Sandoz and RareGen, LLC; |
| ● | The impact of competing therapies on sales of our commercial products and the amount of inventory of our products that will expire unsold, including the impact of generic versions of Adcirca and Remodulin; established therapies such as Uptravi; and newly-developed therapies; |
| ● | The expectation that we will be able to manufacture sufficient quantities and maintain adequate inventories of our commercial products, through both our in-house manufacturing capabilities and third-party manufacturing sites, and our ability to obtain and maintain related approvals by the FDA and other regulatory agencies; |
| ● | The adequacy of our intellectual property protection and the validity and expiration dates of the patents we own or license, as well as the regulatory exclusivity periods for our products; |
| ● | The expected eligibility of patents for inclusion in the Orange Book; |
| ● | Any statements that include the words “believe,” “seek,” “expect,” “anticipate,” “forecast,” “project,” “intend,” “estimate,” “should,” “could,” “may,” “will,” “plan,” or similar expressions; and |
41
| ● | Other statements contained or incorporated by reference in this Report that are not historical facts. |
These statements are subject to risks and uncertainties and our actual results may differ materially from anticipated results. Factors that may cause such differences include, but are not limited to, those discussed below. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.
Risks Related to Our Business
We rely heavily on sales of Remodulin, Tyvaso, and Orenitram to generate revenues and support our operations.
Sales of our current treprostinil-based PAH therapies (Remodulin, Tyvaso, and Orenitram) comprise the vast majority of our revenues. Decreased sales of any one of these products could have a material adverse impact on our operations. A wide variety of events, such as withdrawal of regulatory approvals or substantial changes in prescribing practices or dosing patterns, many of which are described in other risk factors below, could cause sales of these products to decline, or to grow more slowly than expected. Generic competition due to the current commercial availability of generic versions of Remodulin, which launched in the United States in March 2019 and in certain countries in Europe in 2019, and which we expect will be launched in certain other countries in Europe during 2020, has decreased and may continue to decrease our revenues. In addition, generic versions of Tyvaso and Orenitram, which could be launched in the United States by Watson and Actavis as early as January 2026 and June 2027, respectively (or earlier under certain circumstances), may decrease our revenues. A number of companies are developing new PAH therapies, such as LIQ861, a dry powder formulation of treprostinil designed for deep-lung delivery using a disposable inhaler being developed by Liquidia, which if approved could negatively impact sales of our current products and potential sales of the PAH products we are developing. In addition, the inability of any third party that manufactures, markets, distributes or sells any of our commercial products to perform these functions satisfactorily, or our inability to manage our internal manufacturing processes, could result in an inability to meet patient demand and decrease sales. Finally, our strategy involves the development and successful launch of next-generation delivery systems (such as the Implantable System for Remodulin, Remunity and Trevyent) and expanded indications for our existing treprostinil-based products. We may not be able to successfully launch the Implantable System for Remodulin, Remunity or Trevyent for regulatory or other reasons, and demand for these products following their launch may not meet our expectations. As a result, the revenue opportunity for our treprostinil products could be significantly lower than we expect.
If our products fail in clinical trials, we will be unable to obtain FDA and international regulatory approvals and will be unable to sell those products.
To obtain regulatory approvals from the FDA and international regulatory agencies to sell new products, or to expand the product labeling for our existing products to new indications, we must conduct clinical trials demonstrating that our products are safe and effective. These regulators have substantial discretion over the approval process for our products, and may not agree that we have demonstrated the requisite level of product safety and efficacy to grant approval.
The FDA and other regulatory agencies may require us to amend ongoing trials or perform additional trials beyond those we planned, which could result in significant delays and additional costs or may be unsuccessful. For example, approval of an NDA or a BLA could be delayed if the FDA determines that it cannot review or approve the application as submitted. In such a case, the FDA may require substantial additional studies, testing or information in order to complete its review of the application. If our clinical trials are not successful, or we fail to address any identified deficiencies adequately, we will not obtain required approvals to market the new product or new indication.
42
We cannot predict with certainty the length of time it will take to complete necessary clinical trials or obtain regulatory approvals related to our current or future products. The length of time we need to complete clinical trials and obtain regulatory approvals varies by product, indication and country.
Our clinical trials have in the past and may in the future be discontinued, delayed, canceled or disqualified for various reasons, including:
| ● | The drug is ineffective, or physicians and/or patients believe that the drug is ineffective, or that other therapies are more effective or convenient; |
| ● | We fail to reach agreement with the applicable regulatory agencies regarding the scope or design of our clinical trials; |
| ● | Patients do not enroll, patients drop out, or we do not observe worsening events, at the rate we expect; |
| ● | Ongoing or new clinical trials conducted by drug companies in addition to our own clinical trials reduce the availability of patients for our trials; |
| ● | Our clinical trial sites, contracted clinical trial administrators or clinical studies conducted entirely by third parties do not adhere to trial protocols and required quality controls under good clinical practices (GCP) regulations and similar regulations outside the United States; |
| ● | Patients experience severe side effects during treatment or die during our trials because of adverse events related to the trial drug, advanced disease, or other medical complications; and |
| ● | The results of our clinical trials conducted in a particular country are not acceptable to regulators in other countries. |
We may not compete successfully with established and newly developed drugs or products, or the companies that develop and market them.
We compete with well-established drug companies for market share, as well as, among other things, funding, licenses, expertise, personnel, clinical trial patients and investigators, consultants and third-party collaborators. Most of these competitors have substantially greater financial, marketing, manufacturing, sales, distribution and technical resources, and a larger number of approved products, than we do. These competitors also possess greater experience in areas critical to success such as research and development, clinical trials, sales and marketing and regulatory matters.
Numerous treatments currently compete with our commercial therapies, and others are under development. For example, for the treatment of PAH, we compete with Adempas®, Flolan®, Ilomedin®, Letairis®, Opsumit®, Revatio®, Tracleer®, Uptravi®, Veletri®, Volibris®, Ventavis®, generic tadalafil, generic treprostinil injection, generic epoprostenol and generic sildenafil citrate. Our competitors may introduce new products that render all or some of our technologies and products obsolete or noncompetitive. For example, Liquidia is developing LIQ861, a dry powder formulation of treprostinil designed for deep-lung delivery using a disposable inhaler, which if successful would compete directly with Tyvaso and Treprostinil Technosphere. In addition, we may not compete successfully against generic competitors. Sales of a generic version of Adcirca launched in August 2018 and have had a material adverse impact on demand for Adcirca. Generic versions of Remodulin were launched in the United States in March 2019 and in certain countries in Europe in 2019 and may also be launched in certain additional countries in Europe in 2020 (or later), as described elsewhere in this Report. These launches could materially impact our revenues. Furthermore, we have limited visibility into the level of Adcirca inventory held by wholesale distributors and pharmacies, and rapid generic penetration could cause substantial amounts of Adcirca to expire unsold, causing us to incur increased liabilities for product returns. Any change in our estimated allowance for returns could result in a material impact on our revenues during the quarter in which the change is made.
43
Legislation such as the 21st Century Cures Act, which was enacted in December 2016 and designed to encourage innovation and bring pharmaceutical products to market more quickly, may enable our competitors to bring competing products to market on an expedited basis. In addition, alternative approaches to treating chronic diseases, such as gene therapy, cell therapy or transplantation technologies, may make our products obsolete or noncompetitive. Patients and doctors may discontinue use of our products if they perceive competing products as safer, more effective, less invasive, more convenient and/or less expensive than ours. Alternatively, doctors may reduce the prescribed doses of our products if they prescribe them in combination with competing products. In addition, many competing therapies are less invasive or more convenient than Tyvaso and Remodulin, and the use of these products often delays or prevents initiation of Tyvaso or Remodulin therapy. Any of these circumstances could negatively impact our operating results.
Sales of our products are subject to reimbursement from government agencies and other third parties. Pharmaceutical pricing and reimbursement pressures may negatively impact our sales.
The commercial success of our products depends, in part, on the coverage by governmental payers such as Medicare and Medicaid, and private insurance companies. A significant portion of our product sales in the United States are reimbursed under the Medicare and Medicaid programs. A reduction in the availability or extent of reimbursement from domestic or foreign government health care programs could have a material adverse effect on our business and results of our operations. In the United States, the European Union and other potentially significant markets for our products, government payers and/or third-party payers are increasingly attempting to limit or regulate the price of medicinal products and frequently challenge the pricing of new or expensive drugs. Financial pressures may cause United States government payers to seek cost containment more aggressively by mandating discounts or rebates on our products, limiting future price increases, capping reimbursement rates for pharmaceuticals to rates paid internationally, requiring the automatic substitution of generic products, demanding more rigorous requirements for initial coverage for new products or other similar measures. The Centers for Medicare and Medicaid Services (CMS) released an advance notice of proposed rulemaking in October 2018 that discussed the development of an international pricing index model that would cap reimbursement for many drugs paid for under the Medicare Part B program (which could apply to Remodulin and Tyvaso) to those paid in 16 other industrialized countries. CMS has not yet released its proposed rule, however, and the specifics of any such rule are unknown at this time.
In many markets outside the United States, governments control the prices of prescription pharmaceuticals through the implementation of reference pricing, price cuts, rebates, revenue-related taxes and profit control.
Our prostacyclin analogue products (Remodulin, Tyvaso and Orenitram) and our oncology product (Unituxin) are expensive therapies. Consequently, it may be difficult for our specialty pharmacy distributors to obtain adequate reimbursement for our products from commercial and government payers to motivate such distributors to support our products. Alternatively, third-party payers may reduce the amount of reimbursement for our products based on changes in pricing of other therapies for the same disease or the development of new payment methodologies to cover and reimburse treatment costs, such as the use of cost-effectiveness research or value-based payment contracts. In addition, third-party payers often encourage the use of less-expensive generic alternative therapies, which has materially impacted our Adcirca revenues and which may materially impact our Remodulin revenues. If commercial and/or government payers do not cover our products or limit payment rates, patients and physicians could choose competing products that are covered and may have lower out-of-pocket costs. For example, Medicare Advantage Plans are now allowed to use step therapy for Part B drugs, which could limit patient access to our products by requiring patients to try other medicines, including generic products, before using specific therapies.
44
Patient assistance programs for pharmaceutical products have come under increasing scrutiny by governments, legislative bodies and enforcement agencies. These activities may result in actions that have the effect of reducing prices or demand for our products, harming our business or reputation, or subjecting us to fines or penalties.
Recently, there has been enhanced scrutiny of company-sponsored patient assistance programs, including insurance premium and co-pay assistance programs and manufacturers’ donations to third-party charities that provide such assistance. The Department of Justice (DOJ) has taken enforcement action against pharmaceutical companies, including us in 2017, alleging violations of the Federal False Claims Act and other laws in connection with patient assistance programs. In December 2017, we entered into a civil Settlement Agreement with the U.S. Government to resolve the DOJ investigation related to our support of 501(c)(3) organizations that provide financial assistance to patients and paid $210.0 million, plus interest, to the U.S. Government upon settlement. We also entered into a Corporate Integrity Agreement (the CIA) with the Office of Inspector General of the Department of Health and Human Services (OIG), which requires us to maintain our corporate compliance program and to undertake a set of defined corporate integrity obligations for a period of five years from the date the agreement was signed.
We may be required to incur significant future costs to comply with the CIA. If we fail to comply with applicable regulatory requirements or the CIA, we could be subject to penalties including fines, suspension of regulatory approvals that cause us to suspend production, distribution or marketing activities, product recalls, seizure of our products and/or criminal prosecution. If regulatory sanctions are applied or regulatory approval is delayed or withdrawn, our operating results and the value of our company may be adversely affected. In addition, our reputation could be harmed as a result of any such regulatory restrictions or actions, and patients and physicians may avoid the use of our products even after we have resolved the issues that led to such regulatory action.
In the future, if we, our vendors or donation recipients, are deemed to have failed to comply with relevant laws, regulations or government guidance in any of these areas, we could be subject to additional criminal and civil sanctions, including significant fines, civil monetary penalties and exclusion from participation in government healthcare programs, including Medicare and Medicaid, and burdensome remediation measures. Actions could also be brought against executives overseeing our business or other employees.
Members of Congress have recently called upon the OIG to issue revised guidance about patient assistance programs. It is possible that these, or any other actions taken by the DOJ or other agencies as a result of this industry-wide inquiry could reduce demand for our products and/or reduce coverage of our products, including by federal health care programs such as Medicare and Medicaid and state health care programs. If any or all of these events occur, our business, prospects and stock price could be materially and adversely affected.
Additionally, payers and pharmacy benefit managers (PBMs) have developed several different mechanisms to limit the benefits of co-pay assistance for commercially insured programs through co-pay accumulator programs. Under these programs, a patient using co-pay assistance is not able to count the manufacturer’s co-payment contribution toward their annual out-of-pocket payment maximum. Therefore, patients on expensive therapies utilizing co-pay assistance to help cover the costs of their expensive medications are penalized financially for the use of these programs. Some states have passed legislation to limit the use of co-pay accumulator programs, while the Trump administration and other states have indicated that the use of these programs should be allowed to limit cost of care and encourage patients to use lower cost generics. Growing use of programs like these could affect patient access to our products and limit product utilization, which may, in turn, adversely affect our business, prospects and stock price.
45
Our manufacturing strategy exposes us to significant risks.
We must be able to manufacture sufficient quantities of our commercial products to satisfy demand. We manufacture Remodulin, Orenitram, Tyvaso and Unituxin, including the active ingredient in each of these products, at our own facilities and rely on third parties for additional manufacturing capacity for Remodulin, Tyvaso, and finished Unituxin drug product. However, we rely on a variety of third-party sole manufacturers for certain elements of our commercial and development-stage products, as detailed under the risk factor below entitled, We rely in part on third parties to perform activities that are critical to our business. Our ability to generate commercial sales or conduct clinical trials has in the past, and could in the future, suffer if our third-party suppliers and service providers fail to perform.
If any of our internal or third-party manufacturing and supply arrangements are interrupted for compliance issues or other reasons, we may not have sufficient inventory to meet future demand. In addition, any change in suppliers and/or service providers could interrupt the manufacturing of our commercial products and impede the progress of our commercial launch plans and clinical trials.
In addition, our internal manufacturing process subjects us to risks as we engage in increasingly complex manufacturing processes. For example, Remodulin, Tyvaso and Unituxin are sterile solutions that must be prepared under highly-controlled environmental conditions, which are challenging to maintain on a commercial scale. In addition, Unituxin is a monoclonal antibody. As with all biologic products, monoclonal antibodies are inherently more difficult to manufacture than our treprostinil-based products and involve increased risk of viral and other contaminants. We manufacture our entire supply of Orenitram and dinutuximab, the active ingredient in Unituxin, without an FDA-approved back-up manufacturing site. We built a new facility to expand our manufacturing capacity for dinutuximab, which is currently being qualified, and which must receive FDA approval prior to commercial use. We presently have no plans to engage a third-party contract manufacturer to manufacture Orenitram or dinutuximab. Our long-term organ manufacturing programs will involve exceptionally complicated manufacturing processes, many of which have never been attempted on a clinical or commercial scale. It will take substantial time and resources to develop and implement such manufacturing processes, or we may never be able to do so successfully.
Additional risks we face with our manufacturing strategy include the following:
| ● | We and our third-party manufacturers are subject to the FDA’s current good manufacturing practices regulations, current good tissue practices, and similar international regulatory standards. Our ability to exercise control over regulatory compliance by our third-party manufacturers is limited; |
| ● | We may experience difficulty designing and implementing processes and procedures to ensure compliance with applicable regulations as we develop manufacturing operations for new products; |
| ● | Natural and man-made disasters (such as fires, contamination, power loss, hurricanes, earthquakes, flooding, terrorist attacks and acts of war) impacting our internal and third-party manufacturing sites could cause a supply disruption — for example, Medtronic manufactures the Implantable System for Remodulin at its facilities in Puerto Rico, which is vulnerable to hurricanes and earthquakes; |
| ● | Even if we and our third-party manufacturers comply with applicable drug manufacturing regulations, the sterility and quality of our products could be substandard and such products could not be sold or used or subject to recalls; |
| ● | If we had to replace our own manufacturing operations or a third-party manufacturer, the FDA and its international counterparts would require new testing and compliance inspections. Furthermore, a new manufacturer would have to be familiarized with the processes necessary to manufacture and commercially validate our products, as producing our treprostinil-based and biologic products is complex; |
| ● | We may be unable to contract with needed manufacturers on satisfactory terms or at all; and |
46
| ● | The supply of materials and components necessary to manufacture and package our products may become scarce or unavailable, which could delay the manufacturing and subsequent sale of such products. Products manufactured with substituted materials or components must be approved by the FDA and applicable international regulatory agencies before they could be sold. |
Any of these factors could disrupt sales of our commercial products, delay clinical trials or commercialization of new products, result in product liability claims and product recalls, and entail higher costs. Interruptions in our manufacturing process could be significant given the length of time and complexity involved in obtaining necessary regulatory approvals for alternative arrangements, through either third parties or internal manufacturing processes.
We face risks related to health epidemics and other outbreaks, which could significantly disrupt our operations and/or business.
Our business could be adversely impacted by the effects of the coronavirus (COVID-19) outbreak originating in China, or by other epidemics. Although we do not currently source active pharmaceutical ingredients (API) or drug product from China, our supply chain for other raw materials and critical components is worldwide and accordingly could be subject to disruption. We intentionally keep safety stock of API, drug product, critical raw materials and components, however shelf life of these items affects reorder points and we may not be able to sustain long periods of disruption. Certain of our research and development efforts are conducted globally, including our ongoing clinical trials for ralinepag, which includes investigative sites in China. A health epidemic or other outbreak, including the current coronavirus outbreak, may materially and adversely affect our business, financial condition and results of operations.
We rely in part on third parties to perform activities that are critical to our business. Our ability to generate commercial sales or conduct clinical trials has in the past, and could in the future, suffer if our third-party suppliers and service providers fail to perform.
Third parties assist us in activities critical to our operations, such as: (1) manufacturing our clinical and commercial products; (2) conducting clinical trials, preclinical studies and other research and development activities; (3) obtaining regulatory approvals; (4) conducting pharmacovigilance-related and product complaint activities, including drug safety, reporting adverse events and product complaints; and (5) marketing and distributing our products.
We rely on various distributors to market, distribute and sell Remodulin, Tyvaso, Orenitram and Unituxin. From time-to-time, we increase the price of products sold to our U.S.-based and international distributors. Our price increases may not be fully reimbursed by third-party payers. If our distributors do not achieve acceptable profit margins on our products, they may reduce or discontinue the sale of our products. Furthermore, if our distributors devote fewer resources to sell our products or are unsuccessful in their sales efforts, our revenues may decline materially. Outside the United States, we rely substantially on our international distributors to obtain and maintain regulatory approvals for our products and to market and sell our products in compliance with applicable laws and regulations. In the United States, we derive all of our treprostinil revenues from sales to two distributors, Accredo and CVS Specialty. If either distributor places significantly larger or smaller orders in a given time period, our revenues can be materially impacted in a way that does not accurately track patient demand.
We rely on Lilly to manufacture and supply Adcirca for us, and we use Lilly’s pharmaceutical wholesaler network to distribute Adcirca. If Lilly is unable to manufacture or supply Adcirca or its distribution network is disrupted, it could delay, disrupt or prevent us from selling Adcirca. In addition, Lilly has the right to determine the price of Adcirca. Changes in the price of Adcirca set by Lilly could adversely impact demand or reimbursement for Adcirca.
47
Any change in service providers could interrupt the distribution of our commercial products and our other products and services, and impede the progress of our clinical trials, commercial launch plans and related revenues.
We rely heavily on third-party contract research organizations, contract laboratories, clinical investigative sites and other third-parties to conduct our clinical trials, preclinical studies and other research and development activities. In addition, the success of certain products we are developing will depend on clinical trials sponsored by third parties. Failure by any third party to conduct or assist us in conducting clinical trials in accordance with study protocols, quality controls and GCP, or other applicable U.S. or international requirements or to submit associated regulatory filings, could limit or prevent our ability to rely on results of those trials in seeking regulatory approvals.
We rely entirely on third parties to supply pumps and other supplies necessary to deliver Remodulin. There are a limited number of pumps available in the market, and the discontinuation of any particular pump could have a material, adverse impact on our Remodulin revenues if a viable supply of an alternate pump is not available.
We rely entirely on Minnetronix Inc. as the sole manufacturer of the Tyvaso Inhalation System. As Tyvaso is a drug-device combination, we cannot sell Tyvaso without the Tyvaso Inhalation System.
We rely heavily on Medtronic for the success of our program to develop an implantable pump to deliver intravenous Remodulin (the Implantable System for Remodulin). In particular, Medtronic is entirely responsible for regulatory approvals and all manufacturing and quality systems related to its infusion pump and related components. This includes satisfying FDA-imposed PMA conditions prior to launching the Implantable System for Remodulin, which Medtronic has not been able to do as quickly as we expected. Medtronic entered into a consent decree related to the SynchroMed II implantable infusion pump systems. Medtronic’s failure to comply with the ongoing obligations under the consent decree could adversely impact Medtronic’s ability to manufacture and supply the Implantable System for Remodulin. In the event Medtronic is unwilling or unable to supply the system for any reason, including further delays in satisfying outstanding FDA-imposed conditions, our ability to meet patient demand and generate additional revenues will be materially adversely impacted.
We rely heavily on MannKind for various manufacturing activities related to Treprostinil Technosphere. MannKind announced that its currently available cash and financing sources are not sufficient to continue to meet its current and anticipated cash requirements, raising substantial doubt about its ability to continue as a going concern. If MannKind is unable to supply us with devices and other components necessary to develop and manufacture Treprostinil Technosphere, the timing and success of this program could be materially adversely impacted.
We rely heavily on DEKA and its affiliates for the development, manufacturing and regulatory approval of Remunity, our pre-filled, semi-disposable system for subcutaneous treprostinil.
Finally, we also rely on various sole-source suppliers for manufacturing activities related to ralinepag, LNG01 (formerly SM04646) and Trevyent.
For a further discussion of risks created by the use of third-party contract manufacturers, see the risk factor above entitled, Our manufacturing strategy exposes us to significant risks.
48
Our operations must comply with extensive laws and regulations in the United States and other countries, including FDA regulations. Failure to obtain approvals on a timely basis or to achieve continued compliance with these requirements could delay, disrupt or prevent the commercialization of our products.
The products we develop must be approved for marketing and sale by regulatory agencies. Our research and development efforts must comply with extensive regulations, including those promulgated by the FDA and the U.S. Department of Agriculture. The process of obtaining and maintaining regulatory approvals for new drugs is lengthy, expensive and uncertain. The regulatory approval process is particularly uncertain for our transplantation programs, which include the development of xenotransplantation, regenerative medicine, biomechanical lungs and cell-based products. Once approved, the manufacture, distribution, advertising and marketing of our products are subject to extensive regulation, including product labeling, strict pharmacovigilance and adverse event and medical device reporting, complaint processing, storage, distribution and record-keeping requirements. Our product candidates have in the past and may in the future fail to receive regulatory approval on a timely basis, or at all. If granted, product approvals can be conditioned on the completion of post-marketing clinical studies, accompanied by significant restrictions on the use or marketing of a given product and withdrawn for failure to comply with regulatory requirements, such as post-marketing requirements and post-marketing commitments, or upon the occurrence of adverse events subsequent to commercial introduction. If data from post-marketing studies suggest that an approved product presents an unacceptable safety risk, regulatory authorities could withdraw the product’s approval, suspend production or place other marketing restrictions on that product.
Regulatory approval for our currently marketed products is limited by the FDA and other regulators to those specific indications and conditions for which clinical safety and efficacy have been demonstrated.
Any regulatory approval of our products is limited to specific diseases and indications for which our products have been deemed safe and effective by the FDA. FDA approval is also required for new formulations and new indications for an approved product. If we are not able to obtain FDA approval for any desired future indications for our products, our ability to effectively market and sell our products may be reduced.
While physicians may choose to prescribe drugs for uses that are not described in the product’s labeling and for uses that differ from those approved by regulatory authorities (called “off-label” uses), our ability to promote our products is limited to those indications that are specifically approved by the FDA. If our promotional activities fail to comply with regulations or guidelines related to off-label promotion, we may be subject to warnings from, or enforcement action by, these authorities. In addition, failure to follow FDA rules and guidelines related to promotion and advertising can result in the FDA’s refusal to approve a product, suspension or withdrawal of an approved product from the market, product recalls, fines, disgorgement of money, operating restrictions, civil lawsuits, injunctions or criminal prosecution.
We must comply with various laws in jurisdictions around the world that restrict certain marketing practices in the pharmaceutical and medical device industries. Failure to comply with such laws could result in penalties and have a material adverse effect on our business, financial condition and results of operations.
Our business activities may be subject to challenge under laws in jurisdictions around the world restricting particular marketing practices such as anti-kickback and false claim statutes, the Foreign Corrupt Practices Act and the United Kingdom Bribery Act. Any penalties imposed upon us for failure to comply could have a material adverse effect on our business and financial condition.
49
In the United States, the Federal Anti-Kickback Statute prohibits, among other activities, knowingly and willfully offering, paying, soliciting, or receiving compensation to induce, or in return for, the purchase, lease, order or arranging the purchase, lease or order of any health care product or service reimbursable under any federally financed health-care program. This statute has been interpreted broadly to apply to arrangements between pharmaceutical manufacturers and prescribers, purchasers, formulary managers, patients, and others. The exemptions and safe harbors under this statute may be narrow, and practices that involve compensation may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Our practices do not always qualify for safe harbor protection.
The Federal False Claims Act, as amended by the Patient Protection and Affordable Care Act of 2010 (PPACA), prohibits any person from presenting or causing to be presented a false or fraudulent claim or making or causing a false statement material to a false or fraudulent claim. For example, several pharmaceutical and health care companies have been investigated under this law for allegedly providing free product to customers with the expectation that the customers would bill federal health care programs for the free product. Other companies have been prosecuted for causing false claims to be submitted because of these companies’ marketing of a product for unapproved and non-reimbursable uses. Potential liability under the Federal False Claims Act includes mandatory treble damages and significant per-claim penalties. The majority of states also have statutes similar to the Federal Anti-Kickback Statute and the Federal False Claims Act. Sanctions under these federal and state laws may include treble civil monetary penalties, exclusion of a manufacturer’s product from reimbursement under state government programs, debarment, criminal fines, and imprisonment.
Any investigation, inquiry or other legal proceeding under these laws and related to our operations may adversely affect our business, results of operations or reputation.
The PPACA also imposed reporting requirements for pharmaceutical, biologic and device manufacturers regarding payments or other transfers of value made to physicians and teaching hospitals, including investment interests in such manufacturers held by physicians and their immediate family members during the preceding calendar year. Failure to submit required information may result in civil monetary penalties, which may increase significantly for “knowing failures.” Compliance with these and similar laws on a state-by-state basis is difficult and time consuming.
Government healthcare reform and other reforms could adversely affect our revenue, costs and results of operations.
Our industry is highly regulated and changes in law may adversely impact our business, operations or financial results. The PPACA is a broad measure intended to expand health care coverage within the United States, primarily through the imposition of health insurance mandates on employers and individuals and expansion of the Medicaid program. The Cures Act, meanwhile, contains a wide range of provisions designed to promote clinical research and streamline and expedite the FDA review and approval process. The reforms imposed by these laws will significantly impact the pharmaceutical industry; however, the full effects of the PPACA and the Cures Act will be unknown until all of these provisions are implemented and CMS, the FDA, and other federal and state agencies issue applicable regulations or guidance. Moreover, in the coming years, additional changes could be made to governmental health care programs or FDA regulations that could significantly impact the success of our products or product candidates. We may also face uncertainties as a result of federal and administrative efforts to repeal, substantially modify or invalidate some or all of the provisions of the PPACA. There is no assurance that the PPACA, as currently enacted or as amended in the future, will not adversely affect our business and financial results, and we cannot predict how future federal or state legislative or administrative changes related to healthcare reform will affect our business. The future stability of the PPACA and the resulting impact on our business is thus uncertain and could be material.
50
In addition, many states have proposed legislation that seeks to indirectly or directly regulate pharmaceutical drug pricing by requiring biopharmaceutical manufacturers to publicly report proprietary pricing information or to place a maximum price ceiling on pharmaceutical products purchased by state agencies. As additional legislation is passed, we may experience additional pricing and reporting pressures on our products. For example, in October 2017, California’s governor signed a prescription drug price transparency state bill into law, requiring prescription drug manufacturers to provide advance notice and explanation for price increases of certain drugs that exceed a specified threshold. Since then, similar legislation has also been passed in other states. Similar bills have been previously introduced at the federal level, and the Trump administration has focused attention on proposed efforts to curb prescription drug prices. In May 2018, President Trump and the Health and Human Services (HHS) Secretary released the “American Patients First” blueprint, which included measures to increase generic drug and biosimilar competition, the ability of the Medicare program to negotiate drug prices, public transparency regarding drug prices and information available to beneficiaries regarding ways to lower out-of-pocket costs. The Trump administration has begun implementing many of these measures.
The potential effect of health insurance market destabilization during ongoing repeal and replace discussions, as well as the impact of potential changes to the way costs of drugs are reimbursed and how the Medicaid program is financed through executive orders, legislation, and/or regulation, will likely affect patients’ sources of insurance, PBMs, specialty pharmacy providers, and resultant drug coverage. In addition to the Trump administration’s proposals, discussions continue at the federal level regarding policies that would require manufacturers to pay higher rebates in Medicare Part D, give states more flexibility on drugs that are covered under the Medicaid program, permit the re-importation of prescription medications from Canada or other countries and other policy proposals that could impact reimbursement for our products. In December 2019, the FDA issued a notice of proposed rulemaking that, if finalized, would allow for the importation of certain prescription drugs from Canada, and the FDA published a draft guidance that describes how drug manufacturers can import prescription products that were originally intended for sale in a foreign country. It is difficult to predict the impact, if any, of any such legislation, executive actions or Medicaid flexibility on the use and reimbursement of our products in the United States, including the potential for the importation of generic versions of our products.
In addition, rebate policies could allow state Medicaid programs to request additional supplemental rebates on our products as a result of the increase in the federal base Medicaid rebate. Private insurers could also use the enactment of any federal policies to exert pricing pressure on our products, and to the extent that private insurers or managed care programs follow Medicaid coverage and payment developments, the adverse effects may be magnified by private insurers adopting lower payment schedules.
Reports of actual or perceived side effects and adverse events associated with our products, such as sepsis, could cause physicians and patients to avoid or discontinue use of our products in favor of alternative treatments.
Reports of side effects and adverse events associated with our products could have a significant adverse impact on the sale of our products. An example of a known risk associated with intravenous Remodulin is sepsis, which is a serious and potentially life-threatening infection of the bloodstream caused by a wide variety of bacteria. Intravenous Remodulin is infused continuously through a catheter placed in a large vein in the patient’s chest, and sepsis is a known risk associated with this type of delivery. In addition, Unituxin is associated with severe side effects, and its label contains a boxed warning related to potential infusion reactions and neurotoxicity. We are required to report certain adverse events to the FDA. Development of new products, and new formulations and indications for existing products, could result in new side effects and adverse events which may be serious in nature. Concerns about side effects may affect a physician’s decision to prescribe or a patient’s willingness to use our products.
51
Negative attention from special interest groups may impair our business.
As is common with pharmaceutical and biotechnology companies, our early-stage research and development involves animal testing required by regulatory authorities, which we conduct both directly and through contracts with third parties. Our xenotransplantation and regenerative medicine programs rely heavily on the use of animals to manufacture and test our products. Certain special interest groups categorically object to the use of animals for research purposes. Any negative attention, threats or acts of vandalism directed against our animal research activities in the future could impede the operation of our business.
If any of the license or other agreements under which intellectual property rights are licensed to, or were acquired by us, are breached or terminated, our right to continue to develop, manufacture and sell the products covered by such agreements could be impaired or lost.
Our business depends upon our continuing ability to exploit our intellectual property rights acquired from third parties under product license and purchase agreements. Under each of our purchase agreements, we have rights to certain intellectual property covering a drug or other product or technology. We may be required to license additional intellectual property owned by third parties to continue to develop and commercialize our products.
This dependence on intellectual property developed by others involves the following risks:
| ● | We may be unable to obtain rights to intellectual property that we determine we need for our business at a reasonable cost or at all; |
| ● | If any of our product licenses or purchase agreements are terminated, we may lose our rights to develop, make and sell the products to which such licenses or agreements relate; |
| ● | Our rights to develop and market products to which the intellectual property relates are frequently limited to specific territories and fields of use (such as treatment of particular diseases); and |
| ● | If a licensor of intellectual property fails to maintain the intellectual property licensed, we may lose any ability to prevent others from developing or marketing similar products covered by such intellectual property. In addition, we may be forced to incur substantial costs to maintain the intellectual property ourselves or take legal action seeking to force the licensor to do so. |
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.
The period under which our commercial and developmental therapies are protected by our patent rights is limited. Three of our U.S. patents covering our current methods of synthesizing and producing treprostinil, the active ingredient in Remodulin, Tyvaso and Orenitram, expired in October 2017, and three more will expire in 2028. Our patents related to our individual treprostinil-based products expire at various times between 2018 and 2031. We have entered into settlement agreements with Sandoz and four other generic drug companies permitting them to launch generic versions of Remodulin in the United States. Sandoz commenced marketing of its generic product in the United States in March 2019. Two of these companies have received FDA approval for their ANDAs and announced plans to launch during the third quarter of 2019, and to our knowledge, the other two companies have not yet received FDA approval for their ANDAs. We also settled patent litigation with Actavis and Watson, and entered into settlement agreements permitting them to launch generic versions of Orenitram and Tyvaso in the United States in June 2027 and January 2026, respectively, although each may be permitted to enter the market earlier under certain circumstances.
52
A U.S. patent for Adcirca for the treatment of pulmonary hypertension expired in November 2017, and FDA-conferred regulatory exclusivity expired in May 2018, leading to the launch of a generic version of Adcirca in August 2018. We have no issued patents or pending patent applications covering Unituxin. For further details, please see Part I, Item 1.—Business—Patents and Other Proprietary Rights, Strategic Licenses and Market Exclusivity—Generic Competition.
We continue to conduct research into new methods to synthesize treprostinil and have pending U.S. and international patent applications and patents related to such methods. We also have additional issued and pending patents covering the use of our existing commercial products in new indications and with new devices. However, we cannot be sure that our existing or any new patents will effectively deter or delay competitors’ efforts to bring new products to market, or that additional patent applications will result in new patents. Upon the expiration of any of our patents, competitors may develop generic versions of our products and may market those generic versions at a lower price to compete with our products. Competitors may also seek to design around our patents or exclude patented methods of treatment, such as patent-protected indications, from the label for generic versions of our products in an effort to develop competing products that do not infringe our patents. In addition, patent laws of foreign jurisdictions may not protect our patent rights to the same extent as the patent laws of the United States.
Third parties have challenged, and may in the future challenge, the validity of our patents, through patent litigation and/or initiating proceedings, including re-examinations, inter partes reviews, post-grant reviews and interference proceedings, before the USPTO or other applicable patent filing office, or other means.
Patent litigation can be time consuming, distracting to our operations, costly and may conclude unfavorably for us. In addition, the outcome of patent infringement litigation often is difficult to predict. If we are unsuccessful with respect to any future legal action in the defense of our patents and our patents are invalidated or determined to be unenforceable, our business could be negatively impacted. Even if our patents are determined to be valid or enforceable, it is possible that a competitor could circumvent our patents by effectively designing around the claims of our patents. Accordingly, our patents may not provide us with any competitive advantage.
In addition to patent protection, we also rely on trade secrets to protect our proprietary know-how and other technological advances that we do not disclose to the public. We enter into confidentiality agreements with our employees and others to whom we disclose trade secrets and other confidential information. These agreements may not necessarily prevent our trade secrets from being used or disclosed without our authorization and confidentiality agreements may be difficult, time-consuming and expensive to enforce or may not provide an adequate remedy in the event of unauthorized disclosure. In addition, if any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such third party, or those to whom they communicate such technology or information, from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our business and competitive position could be harmed.
53
Third parties may allege that our products or services infringe their patents and other intellectual property rights, which could result in the payment of royalties. Payment of royalties would negatively affect our profits; furthermore, if we chose to contest these allegations, we could be subject to costly and time-consuming litigation or could lose the ability to continue to sell the related products.
To the extent third-party patents to which we currently do not hold licenses are necessary for us to manufacture, use or sell our products, we would need to obtain necessary licenses to prevent infringement. In the case of products or services that utilize intellectual property of strategic collaborators or other suppliers, such suppliers may have an obligation to secure the needed license to these patents at their cost. Otherwise, we would be responsible for the cost of these licenses. Royalty payments and other fees under these licenses would erode our profits from the sale of related products and services. Moreover, we may be unable to obtain these licenses on acceptable terms or at all. If we fail to obtain a required license or are unable to alter the design of the product to avoid infringing a third-party patent, we would be unable to continue to manufacture or sell related products.
If a third party commences legal action against us for infringement, we could be compelled to incur significant costs to defend the action and our management’s attention could be diverted from our day-to-day business operations, whether or not the action were to have any merit. We cannot be certain that we could prevail in the action, and an adverse judgment or settlement resulting from the action could require us to pay substantial amounts in damages for infringement or substantial amounts to obtain a license to continue to use the intellectual property that is the subject of the infringement claim.
We may not maintain adequate insurance coverage to protect us against significant product liability claims.
The testing, manufacturing, marketing, and sale of drugs and diagnostics involve product liability risks. We may not be able to maintain our current product liability insurance at an acceptable cost, if at all. In addition, our insurance coverage may not be adequate for all potential claims. If claims or losses significantly exceed our liability insurance coverage, we may experience financial hardship or potentially be forced out of business. While we historically have had a limited number of product liability claims, the clinical testing and eventual marketing and sale of new products, reformulated versions of existing products, or existing products in new indications, could expose us to new product liability risks. The launch of new products will raise new product liability risks, and in many cases the quality of these products will depend on the performance of third parties that we do not control (such as Medtronic, in the case of the Implantable System for Remodulin).
If we fail to attract and retain key management and qualified scientific and technical personnel, we may not be able to achieve our business objectives.
Members of our management team, including our founder, Chairman and Chief Executive Officer, Dr. Martine Rothblatt, play a critical role in defining our business strategy and maintaining our corporate culture. The loss of the services and leadership of Dr. Rothblatt or any other members of our senior management team could have an adverse effect on our business. We do not maintain key person life insurance on our senior management team members. In addition, effective succession planning is important to our long-term success. Failure to identify, hire and retain suitable successors for members of our senior management team and to transfer knowledge effectively could impede the achievement of our business objectives. Our future success also depends on our ability to attract and retain qualified scientific and technical personnel. Competition for skilled scientific and technical personnel in the biotechnology and pharmaceutical industries is intense. Furthermore, our compensation arrangements may not be sufficient to attract new qualified scientific and technical employees or retain such core employees. If we fail to attract and retain such employees, we may not be successful in developing and commercializing new therapies for PAH and other diseases.
54
Improper handling of hazardous materials used in our activities could expose us to significant remediation liabilities.
Our research and development and manufacturing activities involve the controlled use of chemicals and hazardous substances and we are expanding these activities in both scale and location. In addition, patients may dispose of our products using means we do not control. Such activities subject us to numerous federal, state, and local environmental and safety laws and regulations that govern the management, storage and disposal of hazardous materials. Compliance with current and future environmental laws and regulations can require significant costs; furthermore, we can be subject to substantial fines and penalties in the event of noncompliance. The risk of accidental contamination or injury from these materials cannot be completely eliminated. Furthermore, once chemical and hazardous materials leave our facilities, we cannot control the manner in which such hazardous waste is disposed of by our contractors. In the event of an accident, we could be liable for substantial civil damages or costs associated with the cleanup of the release of hazardous materials. Any related liability could have a material adverse effect on our business.
If we need additional financing and cannot obtain it, our product development and sales efforts may be limited.
We may be required to seek additional sources of financing to meet unplanned or planned expenditures. Unplanned expenditures could be significant and may result from necessary modifications to product development plans or product offerings in response to difficulties encountered with clinical trials. We may also face unexpected costs in preparing products for commercial sale, or in maintaining sales levels of our currently marketed therapeutic products. In addition, our 2018 Credit Agreement contains affirmative and negative covenants that, among other things, limit our ability to incur additional indebtedness. If we are unable to obtain additional funding on commercially reasonable terms or at all, we may be compelled to delay clinical studies, curtail operations or obtain funds through collaborative arrangements that may require us to relinquish rights to certain products or potential markets.
We may not be able to generate sufficient cash to service our indebtedness, which may have a material adverse effect on our financial position, results of operations and cash flows. In addition, we may be forced to take other actions to satisfy our obligations in connection with our indebtedness, which actions may not be successful.
We may borrow up to $1.5 billion under our 2018 Credit Agreement, which matures in June 2024. Currently, our outstanding principal balance is $850.0 million. Our ability to make payments on or refinance our debt obligations, including any outstanding balance under our 2018 Credit Agreement, and any future debt that we may incur, will depend on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. Our inability to generate sufficient cash flows to satisfy our debt obligations would materially and adversely affect our financial position and results of operations.
If we cannot repay or refinance our debt as it becomes due, we could be forced to take disadvantageous actions, including reducing or delaying investments and capital expenditures, disposing of material assets or operations, seeking additional debt or equity capital or restructuring or refinancing our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, such actions may not be sufficient for us to meet any such debt service obligations. In addition, our ability to withstand competitive pressures and to react to changes in our industry could be impaired.
55
Information technology security breaches and other disruptions could compromise our information and expose us to legal responsibility which would cause our business and reputation to suffer.
We are increasingly dependent on information technology systems and infrastructure, much of which is outsourced to third parties including in “cloud” based platforms. In the ordinary course of our business, we collect, store and use sensitive or confidential data, including intellectual property, our proprietary business information and that of our suppliers, customers and business partners, and personally identifiable information. The secure maintenance of this information is critical to our operations and business strategy. We are subject to laws and regulations in the United States and abroad, such as the Health Insurance Portability and Accountability Act of 1996 and European Union regulations related to data privacy, which require us to protect the privacy and security of certain types of information. Our information technology and infrastructure may be vulnerable to attacks by hackers, breached due to employee error, malfeasance or other disruptions, or subject to system failures. We must continuously monitor and enhance our information security controls to prevent, detect, and/or contain unauthorized activity and malicious software. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. Any breaches or failures could compromise sensitive and confidential information stored on our networks or those of third parties and expose such information to public disclosure, loss or theft. Any actual or alleged unauthorized access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, disruption of our operations, and damage to our reputation which could adversely affect our business, financial condition, or results of operations. In addition, remediation, repair and other costs we may incur as a result of any of the foregoing, including increased costs to protect our information technology systems and infrastructure, and increased insurance premiums, could adversely affect our business, financial condition, or results of operations.
The increasing use of social media platforms presents new risks and challenges.
Social media is increasingly being used to communicate information about our products and the diseases that our therapies are designed to treat. Social media practices in our industry continue to evolve and regulations related to such use are not always clear. This evolution creates uncertainty and risk of noncompliance with regulations applicable to our business. For example, patients and others may use social media channels to comment on the effectiveness of a product or to report an alleged adverse event. When such disclosures occur, we may fail to monitor and comply with applicable adverse event reporting obligations or we may not be able to defend against political and market pressures generated by social media due to restrictions on what we may say about our products. There is also a risk of inappropriate disclosure of sensitive information or negative or inaccurate comments about us on any social networking website. If any of these events were to occur or we otherwise fail to comply with applicable regulations, we could incur liability, face overly restrictive regulatory actions or incur other harm to our business.
Tax legislation may materially adversely affect us.
Tax laws are dynamic and continually changing as new laws are passed and new interpretations of existing laws are issued or applied. Governmental tax authorities are increasingly scrutinizing the tax positions of companies. If federal, state or foreign tax authorities change applicable tax laws or issue new guidance, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.
56
If we are not able to successfully identify, finance, consummate and/or integrate acquisitions, our business operations and financial position could be adversely affected.
In August 2018 we acquired SteadyMed. We also entered into several in-licenses related to ongoing development programs in 2018, including our license with Arena related to ralinepag and our license with MannKind related to Treprostinil Technosphere. We may continue to seek to expand in part through acquisitions of complementary businesses, products and technologies, through business combinations or in-licenses. The success of this strategy will depend on our ability to identify, and the availability of, suitable acquisition candidates. We may incur costs in the preliminary stages of an acquisition, but may ultimately be unable or unwilling to consummate the proposed transaction for various reasons. In addition, acquisitions involve numerous risks, including the ability to realize or capitalize on anticipated synergies; managing the integration of personnel, products and acquired infrastructure and controls; potential increases in operating costs; managing geographically remote operations; the diversion of management’s attention from other business concerns and potential disruptions in ongoing operations during integration; the inherent risks in entering markets and sectors in which we have either limited or no direct experience; and the potential loss of key employees, clients or vendors and other business partners of the acquired companies. External factors, such as compliance with laws and regulations, may also impact the successful integration of an acquired business. Acquisitions could result in dilutive issuances of equity securities, the incurrence of debt, one-time write-offs of goodwill and substantial amortization expenses of other intangible assets. We may be unable to obtain financing on favorable terms, or at all, if necessary to finance future acquisitions, which may make acquisitions impossible or more costly. If we are able to obtain financing, the terms may be onerous and restrict our operations. Further, certain acquisitions may be subject to regulatory approval, which can be time consuming and costly to obtain or may be denied, and if obtained, the terms of such regulatory approvals may impose limitations on our ongoing operations or require us to divest assets.
Risks Related to Our Common Stock
The price of our common stock can be highly volatile and may decline.
The price of common stock can be highly volatile within the pharmaceutical and biotechnology sector. Consequently, there can be significant price and volume fluctuations in the market that may not relate to operating performance. The following table sets forth the high and low closing prices of our common stock for the periods indicated:
| High |
| Low | |||
January 1, 2019 - December 31, 2019 | $ | 126.84 | $ | 74.85 | ||
January 1, 2018 - December 31, 2018 | $ | 151.94 | $ | 101.14 | ||
January 1, 2017 - December 31, 2017 | $ | 168.42 | $ | 114.60 | ||
The price of our common stock could decline sharply due to the following factors, among others:
| ● | Failure to meet our estimates or expectations, or those of securities analysts; |
| ● | Quarterly and annual financial results; |
| ● | Timing of enrollment and results of our clinical trials; |
| ● | Announcements regarding generic or other challenges to the intellectual property relating to our products, the launch of generic versions of our products, and the impact of generic competition on our revenues; |
| ● | Announcements regarding litigation matters, including the lawsuit filed against us by Sandoz and RareGen, LLC; |
57
| ● | Announcements regarding our efforts to obtain FDA approval of, and to launch, new products, such as Remunity, Trevyent, and the Implantable System for Remodulin; |
| ● | Physician, patient, investor or public concerns regarding the efficacy and/or safety of products marketed or being developed by us or by others; |
| ● | Changes in, or new legislation and regulations affecting reimbursement of, our therapeutic products by Medicare, Medicaid or other government payers, and changes in reimbursement policies of private health insurance companies, and negative publicity surrounding the cost of high-priced therapies; |
| ● | Announcements of technological innovations or new products or announcements regarding our existing products, including in particular the development of new, competing PAH therapies; |
| ● | Substantial sales of our common stock by us or our existing shareholders, or concerns that such sales may occur; |
| ● | Future issuances of common stock by us or any other activity which could be viewed as being dilutive to our shareholders; |
| ● | Rumors among, or incorrect statements by, investors and/or analysts concerning our company, our products, or our operations; |
| ● | Failures or delays in our efforts to obtain or maintain regulatory approvals from the FDA or international regulatory agencies; |
| ● | Discovery of previously unknown problems with our marketed products, or problems with our manufacturing, regulatory, compliance, promotional, marketing or sales activities that result in regulatory penalties or restrictions on our products, up to the withdrawal of our products from the market; |
| ● | Accumulation of significant short positions in our common stock by hedge funds or other investors or the significant accumulation of our common stock by hedge funds or other institutional investors with investment strategies that may lead to short-term holdings; and |
| ● | General market conditions. |
Provisions of Delaware law and our amended and restated certificate of incorporation, seventh amended and restated By-laws and employment and license agreements, among other things, could prevent or delay a change of control or change in management that may be beneficial to our public shareholders.
Certain provisions of Delaware law and our amended and restated certificate of incorporation and seventh amended and restated By-laws may prevent, delay or discourage:
| ● | A merger, tender offer or proxy contest; |
| ● | The assumption of control by a holder of a large block of our securities; and/or |
| ● | The replacement or removal of current management by our shareholders. |
For example, our amended and restated certificate of incorporation divides our Board of Directors into three classes. Members of each class are elected for staggered three-year terms. This provision may make it more difficult for shareholders to replace the majority of directors. It may also deter the accumulation of large blocks of our common stock by limiting the voting power of such blocks.
Non-competition and all other restrictive covenants in most of our employment agreements will terminate upon a change of control that is not approved by our Board.
58
Similarly, a change of control, under certain circumstances, could also result in an acceleration of the vesting of outstanding awards under our Share Tracking Awards Plans, stock options and restricted stock units. This, together with any increase in our stock price resulting from the announcement of a change of control, could make an acquisition of our company significantly more expensive to the purchaser. We also have a broad-based change of control severance program, under which employees may be entitled to severance benefits in the event they are terminated without cause (or they terminate their employment for good reason) following a change of control. This program could also increase the cost of acquiring our company.
We enter into certain license agreements that generally prohibit our counterparties or their affiliates from taking necessary steps to acquire or merge with us, directly or indirectly throughout the term of these agreements, plus a specified period thereafter. We are also party to certain license agreements that restrict our ability to assign or transfer the rights licensed to us to third parties, including parties with whom we wish to merge, or those attempting to acquire us. These agreements often require that we obtain prior consent of the counterparties to these agreements if we contemplate a change of control. If these counterparties withhold consent, related agreements could be terminated and we would lose related license rights. For example, Lilly, Samumed and MannKind have the right to terminate our license agreements relating to Adcirca, LNG01 (formerly SM04646) and Treprostinil Technosphere, respectively, in the event of certain change of control transactions. These restrictive change of control provisions could impede or prevent mergers or other transactions that could benefit our shareholders.
Because we do not intend to pay cash dividends, our shareholders must rely on stock appreciation for any return on their investment in us.
We have never declared or paid cash dividends on our common stock. Furthermore, we do not intend to pay cash dividends in the future and our 2018 Credit Agreement contains covenants that may restrict us from doing so. As a result, the return on an investment in our common stock will depend entirely upon the future appreciation in the price of our common stock. There can be no assurances that our common stock will provide a return to investors.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Maryland—We own a 415,000 square foot combination laboratory and office building complex in Silver Spring, Maryland that serves as our co-headquarters and is used for commercial manufacturing. These manufacturing activities include the synthesis of treprostinil, the active ingredient in Remodulin and Tyvaso, and treprostinil diolamine, the active ingredient in Orenitram, as well as dinutuximab, the active ingredient in Unituxin. We also manufacture finished Remodulin, Tyvaso and Unituxin in our Silver Spring complex.
North Carolina—We own a 380,000 square foot combination manufacturing facility and office building in Research Triangle Park, North Carolina (RTP facility), which serves as our co-headquarters and is occupied by our clinical research and development, commercialization and our logistics and manufacturing personnel. We manufacture Orenitram tablets and we package, warehouse and distribute Remodulin, Tyvaso, Orenitram and Unituxin at this location. We also own a 132-acre site containing approximately 330,000 square feet of building space adjacent to our RTP facility, which we use for our research, development and manufacturing facilities related to our lung regeneration program, office space and for future expansion.
We believe that these facilities, along with various other owned and leased facilities, are adequate for our current operations and that additional land and facilities for future expansion are reasonably available.
59
ITEM 3. LEGAL PROCEEDINGS
Currently, and from time to time, we are subject to claims in legal proceedings arising in the normal course of business. While we presently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, cash flows or results of operations, legal proceedings are inherently uncertain, and unfavorable rulings could, individually or in aggregate, have a material adverse effect on our business, financial condition or operating results. Please refer to Note 16—Litigation, to our consolidated financial statements, which is incorporated herein by reference.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
60
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock trades on the Nasdaq Global Select Market under the symbol “UTHR”.
Number of Holders
As of February 19, 2020, there were 34 holders of record of our common stock.
Dividend Policy
We have never paid and have no present intention to pay cash dividends on our common stock in the foreseeable future, and our 2018 Credit Agreement contains covenants that may restrict us from doing so. We intend to retain any earnings for use in our business operations.
Issuer Purchases of Equity Securities
We did not repurchase any of our outstanding equity securities during the year ended December 31, 2019.
Comparison of Five-Year Total Cumulative Shareholder Return
The following chart shows the performance from December 31, 2014 through December 31, 2019 of our common stock, compared with an investment in the stocks represented in each of the Nasdaq U.S. Benchmark TR Index and the Nasdaq ICB: 4577 Pharmaceutical Stock Index, assuming the investment of $100 at the beginning of the period and the reinvestment of dividends, if any.
61
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the notes accompanying our consolidated financial statements and Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Report. The historical results are not necessarily indicative of results to be expected for future periods. The following information is presented in millions, except per share data.
Year Ended December 31, | |||||||||||||||
| 2019(1) |
| 2018 |
| 2017 |
| 2016 | 2015 | |||||||
Consolidated Statements of Operations Data: |
|
|
|
|
| ||||||||||
Total revenues | $ | 1,448.8 | $ | 1,627.8 | $ | 1,725.3 | $ | 1,598.8 | $ | 1,465.8 | |||||
Operating (loss) income | $ | (187.6) | $ | 805.4 | $ | 814.9 | $ | 1,061.7 | $ | 699.0 | |||||
Net (loss) income | $ | (104.5) | $ | 589.2 | $ | 417.9 | $ | 713.7 | $ | 651.6 | |||||
Net (loss) income per common share: |
|
|
|
|
|
|
|
|
|
| |||||
Basic(2) | $ | (2.39) | $ | 13.54 | $ | 9.50 | $ | 16.29 | $ | 14.17 | |||||
Diluted(2) | $ | (2.39) | $ | 13.39 | $ | 9.31 | $ | 15.25 | $ | 12.72 | |||||
As of December 31, | |||||||||||||||
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 | ||||||
Consolidated Balance Sheet Data: |
|
|
|
|
|
| |||||||||
Cash, cash equivalents and marketable investments | $ | 2,253.4 | $ | 1,858.5 | $ | 1,430.1 | $ | 1,053.1 | $ | 991.8 | |||||
Total assets | $ | 3,913.4 | $ | 3,401.0 | $ | 2,879.4 | $ | 2,325.6 | $ | 2,184.4 | |||||
Total non-current liabilities | $ | 670.0 | $ | 316.6 | $ | 313.7 | $ | 130.9 | $ | 144.0 | |||||
Total stockholders’ equity | $ | 2,780.4 | $ | 2,788.6 | $ | 2,101.8 | $ | 1,851.3 | $ | 1,588.6 | |||||
| (1) | Operating loss and net loss for the year ended December 31, 2019 include an upfront payment of $800.0 million to Arena, which was expensed as acquired in-process research and development and included within research and development expenses on our consolidated statements of operations. |
| (2) | Refer to Note 10—Stockholders’ Equity—Earnings Per Common Share to our consolidated financial statements for the computation of basic and diluted net (loss) income per common share. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and related notes to our consolidated financial statements.
Overview of Marketed Products
We currently market and sell the following commercial products:
| ● | Remodulin, a continuously-infused formulation of the prostacyclin analogue treprostinil, approved by the FDA for subcutaneous and intravenous administration to diminish symptoms associated with exercise in patients with pulmonary arterial hypertension (PAH). Remodulin has also been approved in various countries outside of the United States. |
| ● | Tyvaso, an inhaled formulation of treprostinil, approved by the FDA and regulatory authorities in Argentina and Israel to improve exercise ability in PAH patients. |
| ● | Orenitram, a tablet dosage form of treprostinil, approved by the FDA to delay disease progression and improve exercise capacity in PAH patients. |
62
| ● | Unituxin, a monoclonal antibody approved by the FDA and Health Canada for the treatment of high-risk neuroblastoma. |
| ● | Adcirca, an oral PDE-5 inhibitor approved by the FDA to improve exercise ability in PAH patients. |
For additional detail regarding our commercial products, see Item 1—Business—Our Commercial Products.
Research and Development
We are engaged in research and development of new formulations, indications and delivery devices for our existing products. In particular, we are developing Remunity, Trevyent and the Implantable System for Remodulin, all of which are new delivery systems for Remodulin. We are studying Tyvaso in patients with WHO Group 3 pulmonary hypertension. We are also studying dinutuximab in additional oncology indications.
In addition, we are developing new products to treat PAH (OreniPro, RemoPro, Treprostinil Technosphere, Trevyent, ralinepag and Aurora-GT), as well as a product to treat IPF (LNG01) and a product to treat BPD (Unexisome). We are also heavily engaged in early-stage research and development of a number of organ transplantation-related technologies including regenerative medicine, xenotransplantation, biomechanical lungs and ex-vivo lung perfusion. Finally, we are engaged in additional, early-stage research and development efforts in PAH and other diseases. For additional detail regarding our research and development programs, see Item 1—Business—Research and Development.
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 (Accredo) and Caremark, L.L.C. (CVS Specialty) 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, Tyvaso and Unituxin 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.
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 and maximum 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.
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.
63
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 (1) $4.46 in cash, representing aggregate consideration payable to former holders of SteadyMed securities of approximately $141 million; and (2) one contingent value right, representing the right to receive $2.63 in cash upon the achievement of a milestone defined as 3,000 patients initiating 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.
Operating Expenses
Since our inception, we have devoted substantial resources to our various clinical trials and other research and development efforts, which are conducted both internally and through third parties. From time to time, we also license or acquire additional technologies and compounds to be incorporated into our development pipeline.
Our operating expenses include the following costs:
Cost of Product Sales
Our cost of product sales primarily 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 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. We will remain liable for returns of expired Adcirca product even after our license agreement with Lilly expires on December 31, 2020, after which we will no longer be able to sell Adcirca, unless we and Lilly agree to extend the term of our license agreement.
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, significant clinical trial-related expenses, driven by the expansion of our pipeline programs.
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.
64
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). Issuance of awards under these plans was discontinued in 2015. Currently, we grant stock options and restricted stock units under the United Therapeutics Corporation Amended and Restated 2015 Stock Incentive Plan (as amended to date, the 2015 Plan), which provides for the issuance of up to 9,500,000 shares of our common stock, including the 450,000 shares added pursuant to an amendment and restatement of the 2015 Plan approved by our shareholders in June 2019. In February 2019, our Board of Directors approved the 2019 Inducement Stock Incentive Plan (the 2019 Inducement Plan), which provides for the issuance of up to 99,000 shares of our common stock pursuant to awards granted to newly-hired employees. Currently, we grant equity-based awards to employees and members of our Board of Directors in the form of stock options and restricted stock units under the 2015 Plan, and we granted restricted stock units to newly-hired employees under the 2019 Inducement Plan. 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 value of STAP awards and stock options is 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 2.6 million STAP awards outstanding as of December 31, 2019. 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 expense (benefit) 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 expense (benefit) recognized in connection with STAP awards from period to period: (1) volatility in the price of our common stock (specifically, increases in the price of our common stock will generally result in an increase in our STAP liability and related compensation expense, while decreases in our stock price will generally result in a reduction in our STAP liability and related compensation expense); and (2) changes in the number of outstanding awards.
Future Prospects
We anticipate revenue growth in 2020 compared to 2019, driven by: (a) continued growth in the number of patients prescribed with our treprostinil-based products, including growing Orenitram revenues following the recent label expansion for Orenitram to reflect the results of the FREEDOM-EV study; and (b) modest price increases; partially offset by further generic erosion for Adcirca and additional generic launches in Europe. After 2020, we do not expect to generate any revenue from sales of Adcirca (which accounted for $107.2 million of our revenue in 2019), unless we and Lilly agree to extend the term of our license agreement related to Adcirca beyond its current expiration date of December 31, 2020. We believe our pipeline of new products and potential label expansions for existing products should result in a return to revenue growth potentially as early as 2021, although the precise timing depends on a number of factors, including factors that we cannot control. Refer to the risks identified in Part I, Item 1A—Risk Factors, included in this Report.
65
We believe additional revenue growth beyond 2020 will be driven by commercializing six key therapeutic platforms in our pipeline, which are comprised of the enabling technologies described below:
For further details regarding our research and development initiatives, please see Item 1—Business—Research and Development.
Our ability to achieve these objectives, grow our business and maintain profitability will depend on many factors, including among others: (1) the timing and outcome of preclinical research, clinical trials and regulatory approvals for products we develop; (2) the timing and degree of our success in commercially launching new products; (3) the demand for our products; (4) the price of our products and the reimbursement of our products by public and private health insurance organizations; (5) the competition we face within our industry, including competition from generic companies and new PAH therapies; (6) our ability to effectively manage our business in an increasingly complex legal and regulatory environment; (7) our ability to defend against challenges to our patents; and (8) the risks identified in Part I, Item 1A—Risk Factors, included in this Report.
We operate in a highly competitive market in which a small number of large pharmaceutical companies control a majority of available PAH therapies. These pharmaceutical companies are well established in the market and possess greater financial, technical and marketing resources than we do. In addition, there are a number of investigational products in late-stage development that, if approved, may erode the market share of our existing commercial therapies and make market acceptance more difficult to achieve for any therapies we attempt to market in the future.
Results of Operations
This section of this Form 10-K generally discusses 2019, 2018 and 2017 items and year-to-year comparisons between 2019 and 2018. Discussions of year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations of our Form 10-K filed on February 27, 2019 (our 2018 Annual Report).
66
Revenues
The table below presents the components of total revenues (dollars in millions):
Year Ended December 31, | Percentage Change |
| ||||||||||||
| 2019 |
| 2018 |
| 2017 | 2019 v. 2018 |
| 2018 v. 2017 |
| |||||
Net product sales: |
|
|
|
|
| |||||||||
Remodulin | $ | 587.0 | $ | 599.0 | $ | 670.9 |
| (2) | % | (11) | % | |||
Tyvaso |
| 415.6 |
| 415.2 |
| 372.9 |
| — | % | 11 | % | |||
Orenitram |
| 225.3 |
| 205.1 |
| 185.8 |
| 10 | % | 10 | % | |||
Unituxin |
| 113.7 |
| 84.8 |
| 76.0 |
| 34 | % | 12 | % | |||
Adcirca | 107.2 | 323.7 | 419.7 | (67) | % | (23) | % | |||||||
Total revenues | $ | 1,448.8 | $ | 1,627.8 | $ | 1,725.3 | (11) | % | (6) | % | ||||
2019 Compared to 2018
Revenues for the year ended December 31, 2019 decreased by $179.0 million as compared to the same period in 2018, primarily due to a decrease in Adcirca sales as a result of the onset of generic competition for Adcirca in August 2018. Net revenues from our treprostinil-based products (Remodulin, Tyvaso and Orenitram) grew by $8.6 million in 2019, compared to 2018.
As we have noted elsewhere in this Report, our distributors typically place monthly orders based on utilization trends and contractual minimum and maximum 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 for these products. The information we have on patient demand and patients using our products for the first time is based upon our review of patient utilization data provided to us by our specialty pharmaceutical distributors.
U.S. patient demand for Remodulin remained strong across 2019. Despite the launch of generic versions of treprostinil, the number of new U.S. patients starting to use Remodulin in 2019 reached the highest level in the last ten years. A small percentage of higher dose Remodulin patients transitioned to generic treprostinil when the first generic version became available in 2019, but these transitions declined to a negligible amount in the fourth quarter. After these initial transitions to generic treprostinil, U.S. patient demand for Remodulin remained consistent across the second, third and fourth quarters. As new patients who started Remodulin in 2019 titrate to their effective dose, and assuming the rate of patient transitions from Remodulin to generic treprostinil does not materially change, we expect to see a corresponding increase in our U.S. Remodulin revenues in 2020.
During the fourth quarter of 2019, one of our U.S. distributors identified a mistake in its utilization data, which caused the distributor to order more product than normal, primarily in the third quarter of 2019. Specifically, we estimate that the distributor’s excess orders of Remodulin, Tyvaso and Orenitram generated additional net sales for these products totaling $15.6 million, $10.6 million and $5.2 million, respectively, or $31.4 million in total, during the third quarter of 2019. Upon the distributor’s correction of its utilization data in the fourth quarter of 2019, the distributor reduced its purchases of our products in order to normalize its inventory levels. We estimate that this correction reduced our net sales of Remodulin, Tyvaso and Orenitram during the fourth quarter of 2019 by $21.9 million, $14.4 million and $7.3 million, respectively, or $43.6 million in total. We believe this distributor’s inventory levels have returned to normal, and anticipate more traditional ordering patterns going forward. While this inventory fluctuation had a significant impact on our net sales during the third and fourth quarters of 2019, the effect on full-year net revenues was negligible.
67
Remodulin net product sales decreased by $12.0 million in 2019 as compared to 2018. U.S. Remodulin net product sales decreased by $37.5 million, primarily due to: (1) a decrease in quantities sold of $24.0 million, primarily due to changes in patient mix that resulted from a limited number of existing higher dosage patients switching to generic treprostinil, and the fact that new patients start on lower dosages of Remodulin and then begin the process of titrating to their effective dose; and (2) higher gross-to-net revenue deductions of $11.0 million. International Remodulin net product sales increased by $25.5 million, primarily due to higher quantities sold of $47.0 million, partially offset by the $21.5 million impact of price reductions to certain international distributors.
Tyvaso net product sales increased by $0.4 million in 2019 as compared to 2018. This increase was primarily due to: (1) an increase of $21.6 million due to a price increase implemented in January 2019 and (2) the impact of replacing $6.2 million of commercial Tyvaso product in 2018 that a U.S. distributor previously used in connection with a clinical trial. The increase was partially offset by higher gross-to-net revenue deductions of $24.3 million, which included the reversal in 2018 of an estimated $15.4 million liability for Medicaid rebates.
Orenitram net product sales increased by $20.2 million in 2019, as compared to 2018, resulting from: (1) $16.4 million due to growth in the number of patients being treated with Orenitram; and (2) $12.3 million due to a January 2019 price increase, partially offset by higher gross-to-net revenue deductions of $8.5 million.
Unituxin net product sales grew by $28.9 million in 2019, as compared to 2018, resulting from: (1) a $21.5 million increase due to growth in the number of vials sold; and (2) a $8.3 million increase due to an April 2019 price increase.
Adcirca net product sales decreased by $216.5 million in 2019, as compared to 2018, primarily due to a decrease in bottles sold following the onset of generic competition for Adcirca beginning in August 2018.
Gross-to-Net Deductions
We recognize revenues net of: (1) rebates and chargebacks; (2) prompt pay discounts; (3) allowance for sales returns; and (4) distributor fees. These are referred to as gross-to-net deductions and are primarily based on estimates reflecting historical experiences as well as contractual and statutory requirements. We currently estimate our allowance for sales returns using reports from our distributors and available industry data, including our estimate of inventory remaining in the distribution channel. The tables below include a reconciliation of the liability accounts associated with these deductions (in millions):
Year Ended December 31, 2019 | |||||||||||||||
Rebates & | Prompt Pay | Allowance for | Distributor | ||||||||||||
| Chargebacks |
| Discounts |
| Sales Returns |
| Fees |
| Total | ||||||
Balance, January 1, 2019 | $ | 54.7 | $ | 3.2 | $ | 22.4 | $ | 4.8 | $ | 85.1 | |||||
Provisions attributed to sales in: |
|
|
|
|
|
|
|
|
|
| |||||
Current period |
| 172.8 |
| 31.3 |
| (2.6) |
| 19.0 |
| 220.5 | |||||
Prior periods |
| 5.9 |
| — |
| (3.6) |
| — |
| 2.3 | |||||
Payments or credits attributed to sales in: |
|
|
|
|
|
|
|
|
|
| |||||
Current period |
| (126.1) |
| (28.9) |
| — |
| (15.0) |
| (170.0) | |||||
Prior periods |
| (55.6) |
| (3.0) |
| (2.0) |
| (4.7) |
| (65.3) | |||||
Balance, December 31, 2019 | $ | 51.7 | $ | 2.6 | $ | 14.2 | $ | 4.1 | $ | 72.6 | |||||
68
Year Ended December 31, 2018 | |||||||||||||||
Rebates & | Prompt Pay | Allowance for | Distributor | ||||||||||||
| Chargebacks |
| Discounts |
| Sales Returns |
| Fees |
| Total | ||||||
Balance, January 1, 2018 | $ | 74.0 | $ | 4.7 | $ | 7.2 | $ | 3.4 | $ | 89.3 | |||||
Provisions attributed to sales in: |
|
|
|
|
|
|
|
|
|
| |||||
Current period |
| 232.5 |
| 37.7 |
| 17.5 |
| 19.3 |
| 307.0 | |||||
Prior periods |
| (8.8) |
| — |
| — |
| — |
| (8.8) | |||||
Payments or credits attributed to sales in: |
|
|
|
|
|
|
|
|
|
| |||||
Current period |
| (185.4) |
| (34.7) |
| — |
| (14.6) |
| (234.7) | |||||
Prior periods |
| (57.6) |
| (4.5) |
| (2.3) |
| (3.3) |
| (67.7) | |||||
Balance, December 31, 2018 | $ | 54.7 | $ | 3.2 | $ | 22.4 | $ | 4.8 | $ | 85.1 | |||||
Year Ended December 31, 2017 | |||||||||||||||
Rebates & | Prompt Pay | Allowance for | Distributor | ||||||||||||
| Chargebacks |
| Discounts |
| Sales Returns |
| Fees |
| Total | ||||||
Balance, January 1, 2017 | $ | 46.0 | $ | 4.3 | $ | 7.7 | $ | 2.8 | $ | 60.8 | |||||
Provisions attributed to sales in: |
|
|
|
|
|
|
|
|
|
| |||||
Current period |
| 228.2 |
| 37.9 |
| 0.9 |
| 14.5 |
| 281.5 | |||||
Prior periods |
| 13.3 |
| — |
| — |
| (0.2) |
| 13.1 | |||||
Payments or credits attributed to sales in: |
|
|
|
|
|
|
|
|
|
| |||||
Current period |
| (163.1) |
| (33.3) |
| — |
| (10.9) |
| (207.3) | |||||
Prior periods |
| (50.4) |
| (4.2) |
| (1.4) |
| (2.8) |
| (58.8) | |||||
Balance, December 31, 2017 | $ | 74.0 | $ | 4.7 | $ | 7.2 | $ | 3.4 | $ | 89.3 | |||||
Cost of Product Sales
The table below summarizes cost of product sales by major category (dollars in millions):
Year Ended December 31, | Percentage Change |
| ||||||||||||
| 2019 |
| 2018 |
| 2017 |
| 2019 v. 2018 |
| 2018 v. 2017 |
| ||||
Category: |
|
|
|
|
| |||||||||
Cost of product sales | $ | 117.4 | $ | 201.9 | $ | 103.1 |
| (42) | % | 96 | % | |||
Share‑based compensation expense (benefit)(1) |
| 0.2 |
| (3.2) |
| 2.6 |
| 106 | % | (223) | % | |||
Total cost of product sales | $ | 117.6 | $ | 198.7 | $ | 105.7 |
| (41) | % | 88 | % | |||
| (1) | Refer to Share-Based Compensation section below for discussion. |
69
Cost of product sales, excluding share-based compensation. The decrease in cost of product sales of $84.5 million for the year ended December 31, 2019, as compared to the same period in 2018, was primarily attributable to a $91.9 million decrease in royalty expense for Adcirca as fewer bottles were sold following the onset of generic competition for Adcirca beginning in August 2018.
Research and Development
The table below summarizes research and development expense by major category (dollars in millions):
Year Ended December 31, | Percentage Change |
| ||||||||||||
| 2019 |
| 2018 |
| 2017 |
| 2019 v. 2018 |
| 2018 v. 2017 |
| ||||
Category: |
|
|
|
|
| |||||||||
Research and development projects | $ | 1,182.2 | $ | 370.0 | $ | 256.4 |
| 220 | % | 44 | % | |||
Share‑based compensation expense (benefit) (1) |
| 0.4 |
| (12.1) |
| 8.2 |
| 103 | % | (248) | % | |||
Total research and development expense | $ | 1,182.6 | $ | 357.9 | $ | 264.6 |
| 230 | % | 35 | % | |||
| (1) | Refer to Share-Based Compensation section below for discussion. |
Research and development, excluding share-based compensation. The increase in research and development project expenses of $812.2 million for the year ended December 31, 2019, as compared to the same period in 2018, was driven by continued investment in our product pipeline, which includes multiple phase III clinical trials in cardiopulmonary diseases and oncology as well as programs in regenerative medicine and organ manufacturing. Research and development expense for the treatment of cardiopulmonary diseases increased by $804.4 million for the year ended December 31, 2019, as compared to the same period in 2018, due to: (1) an $800.0 million up-front payment to Arena under our licensing agreement related to ralinepag; and (2) $40.3 million of expenditures associated with the phase III ADVANCE studies of ralinepag, partially offset by a $30.0 million decrease in spending related to one-time payments under our licensing and research agreements with MannKind. Research and development expenses for organ manufacturing projects increased by $14.2 million for the year ended December 31, 2019, as compared to the same period in 2018, due to increased preclinical work on technologies designed to increase the supply and distribution of transplantable organs and tissues. Research and development expense for cancer-related projects decreased by $10.9 million for the year ended December 31, 2019, as compared to the same period in 2018, due to a decrease in spending on the DISTINCT study once the study was fully enrolled in late 2018.
Selling, General and Administrative
The table below summarizes selling, general and administrative expense by major category (dollars in millions):
Year Ended December 31, | Percentage Change |
| ||||||||||||
| 2019 |
| 2018 |
| 2017 |
| 2019 v. 2018 |
| 2018 v. 2017 |
| ||||
Category: |
|
|
|
|
| |||||||||
General and administrative | $ | 230.7 | $ | 217.8 | $ | 203.1 |
| 6 | % | 7 | % | |||
Sales and marketing |
| 60.7 |
| 59.1 |
| 64.3 |
| 3 | % | (8) | % | |||
Share‑based compensation expense (benefit)(1) |
| 44.8 |
| (11.1) |
| 62.7 |
| 504 | % | (118) | % | |||
Total selling, general and administrative expense | $ | 336.2 | $ | 265.8 | $ | 330.1 |
| 26 | % | (19) | % | |||
| (1) | Refer to Share-Based Compensation section below for discussion. |
70
General and administrative. The increase in general and administrative expenses of $12.9 million for the year ended December 31, 2019, as compared to the same period in 2018, primarily resulted from: (1) a $6.7 million increase in compensation due to an increase in staffing; and (2) a $5.6 million increase in consulting expenses.
Share-Based Compensation
The table below summarizes share-based compensation expense (benefit) by major category (dollars in millions):
Year Ended December 31, | Percentage Change |
| ||||||||||||
| 2019 |
| 2018 |
| 2017 |
| 2019 v. 2018 |
| 2018 v. 2017 |
| ||||
Category: |
|
|
|
|
| |||||||||
Stock options | $ | 70.5 | $ | 58.5 | $ | 43.0 |
| 21 | % | 36 | % | |||
Restricted stock units |
| 13.3 |
| 7.3 |
| 2.2 |
| 82 | % | 232 | % | |||
STAP awards |
| (39.7) |
| (93.4) |
| 27.1 |
| 57 | % | (445) | % | |||
Employee stock purchase plan |
| 1.3 |
| 1.2 |
| 1.2 |
| 8 | % | — | % | |||
Total share‑based compensation expense (benefit) | $ | 45.4 | $ | (26.4) | $ | 73.5 |
| 272 | % | (136) | % | |||
The table below summarizes share-based compensation expense (benefit) by line item on our consolidated statements of operations (dollars in millions):
Year Ended December 31, | Percentage Change |
| ||||||||||||
| 2019 |
| 2018 |
| 2017 |
| 2019 v. 2018 |
| 2018 v. 2017 |
| ||||
Cost of product sales | $ | 0.2 | $ | (3.2) | $ | 2.6 | 106 | % | (223) | % | ||||
Research and development |
| 0.4 |
| (12.1) |
| 8.2 |
| 103 | % | (248) | % | |||
Selling, general and administrative |
| 44.8 |
| (11.1) |
| 62.7 |
| 504 | % | (118) | % | |||
Total share‑based compensation expense (benefit) | $ | 45.4 | $ | (26.4) | $ | 73.5 |
| 272 | % | (136) | % | |||
The increase in share-based compensation expense of $71.8 million for the year ended December 31, 2019, as compared to the same period in 2018, was primarily due to: (1) a $53.7 million decrease in STAP benefit driven by a more significant decrease in our stock price during 2018 as compared to 2019 and fewer STAP awards outstanding in 2019; (2) a $12.0 million increase in stock option expense due to additional awards of options granted and outstanding in 2019; and (3) a $6.0 million increase in restricted stock unit expense due to additional awards of restricted stock units granted and outstanding in 2019. Refer to Note 9—Share-Based Compensation, to our consolidated financial statements for more information.
Settlement of Loss Contingency
In December 2017, we entered into a civil Settlement Agreement with the U.S. Government to resolve a DOJ investigation related to our support of 501(c)(3) organizations that provide financial assistance to patients. During the second quarter of 2017, we recorded a $210.0 million accrual related to this matter, and ultimately paid this amount, plus interest, to the U.S. Government upon settlement. This matter is described in more detail in Note 16—Litigation—Department of Justice Subpoena, to our consolidated financial statements.
71
Other Income (Expense), Net
The increase in other income (expense), net of $30.3 million for the year ended December 31, 2019, as compared to the same period in 2018, was primarily due to the recognition of net unrealized and realized gains in publicly-traded equity securities. During the year ended December 31, 2019, we recognized $21.4 million of unrealized and realized gains on these securities. Refer to Note 4—Investments—Investments in Equity Securities with Readily Determinable Fair Values, to our consolidated financial statements. The remaining increase in other income, net for the year ended December 31, 2019 was primarily due to an increase of $4.8 million of net unrealized and realized foreign currency gains compared to the same period in 2018.
Impairments of Investments in Privately-Held Companies
During the years ended December 31, 2019, 2018 and 2017, we recorded zero, $53.5 million, and $49.6 million, respectively, of impairment charges related to our investments in privately-held companies.
Income Tax (Benefit) Expense
The income tax benefit was $60.5 million for the year ended December 31, 2019, as compared to income tax expense of $169.7 million for the same period in 2018. For the years ended December 31, 2019 and 2018, the effective income tax rates (ETR) were approximately 37 percent and 22 percent, respectively. We recognized a loss before income taxes, and a corresponding income tax benefit for the year ended December 31, 2019, as a result of the one-time $800.0 million payment to Arena in January 2019. As a result of this loss, the tax benefit and resulting ETR for the year ended December 31, 2019 increased, primarily due to our anticipated tax credits, compared to the year ended December 31, 2018. For additional details, refer to Note 11—Income Taxes to our consolidated financial statements.
72
Financial Condition, Liquidity and Capital Resources
We have funded our operations principally through sales of our commercial products and, from time-to-time, third-party financing arrangements. We believe that our current liquidity is sufficient to fund ongoing operations and future business plans as we expect long-term revenues from our commercial products, excluding Adcirca, to continue to grow due to our work on development of new products and label expansions for existing products. Furthermore, our customer base remains stable and we believe it presents minimal credit risk. However, any projections of future cash flows are inherently subject to uncertainty and we may seek other forms of financing. In June 2018, we entered into a credit agreement (the 2018 Credit Agreement), which provides an unsecured, revolving line of credit of up to $1.5 billion. Our aggregate outstanding balance under the 2018 Credit Agreement to $850.0 million as of December 31, 2019. Although our credit facility matures in 2024, we classified $250.0 million of the outstanding balance as a current liability as of December 31, 2019 on our consolidated balance sheet as we intend to repay this amount within one year. See Unsecured Revolving Credit Facility below for further details.
For information regarding the fluctuation explanations between 2018 and 2017, refer to our 2018 Annual Report.
Cash and Cash Equivalents and Marketable Investments
Cash and cash equivalents and marketable instruments comprise the following (dollars in millions):
Year Ended | Percentage |
| |||||||
December 31, | Change |
| |||||||
| 2019 |
| 2018 |
| 2019 v. 2018 |
| |||
Cash and cash equivalents | $ | 738.4 | $ | 669.2 | 10 | % | |||
Marketable investments—current |
| 747.5 |
| 746.7 |
| — | % | ||
Marketable investments—non-current |
| 767.5 |
| 442.6 |
| 73 | % | ||
Total cash and cash equivalents and marketable investments | $ | 2,253.4 | $ | 1,858.5 |
| 21 | % | ||
73
Cash Flows
Cash flows comprise the following (dollars in millions):
Year Ended December 31, | Percentage Change |
| ||||||||||||
| 2019 |
| 2018 |
| 2017 |
| 2019 v. 2018 |
| 2018 v. 2017 |
| ||||
Net cash (used in) provided by operating activities | $ | (206.6) | $ | 778.4 | $ | 474.2 | (127) | % | 64 | % | ||||
Net cash used in investing activities | $ | (335.4) | $ | (820.6) | $ | (835.6) |
| 59 | % | 2 | % | |||
Net cash provided by financing activities | $ | 611.2 | $ | 6.3 | $ | 43.3 |
| NM | (1) | (85) | % | |||
| (1) | Calculation is not meaningful. |
Operating Activities
Our operating assets and liabilities consist primarily of accounts receivable, inventories, accounts payable, accrued expenses, liabilities for our STAP awards and tax-related payables and receivables.
The decrease of $985.0 million in net cash from operating activities for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily due to: (1) an $812.2 million increase in research and development expense, excluding share-based compensation expense (benefit), driven by continued investment in our product pipeline, which includes an $800.0 million upfront payment related to our license agreement with Arena; (2) a $179.0 million decrease in revenues during the year, which resulted in lower cash collections; (3) a $31.6 million increase in cash paid for interest; and (4) a $17.5 million increase in cash paid for income taxes. The increase in cash used was partially offset by a decrease of $68.1 million in cash paid to settle STAP awards for the year ended December 31, 2019 compared to the year ended December 31, 2018. The remainder of the change in cash used in operating activities was due to other changes in assets and liabilities.Investing Activities
The decrease of $485.2 million in net cash used in investing activities for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily due to: (1) a $209.4 million decrease in cash used for net purchases of marketable investments; (2) $124.1 million in net cash paid related to the acquisition of SteadyMed in 2018; (3) a $100.7 million decrease in cash paid to purchase property, plant and equipment; (4) a $46.0 million decrease in deposits; and (5) a $20.5 million increase in cash from the sale of investments in equity securities. The decrease in cash used in investing activities was partially offset by an increase in cash used of $12.5 million due to deconsolidation of our variable interest entity. Refer to Note 4—Investments—Deconsolidation of a Variable Interest Entity to our consolidated financial statements.
Financing Activities
The increase of $604.9 million in net cash provided by financing activities for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily due to $800.0 million that we borrowed under our Credit Agreement, which was used to fund an $800.0 million upfront payment under our license agreement with Arena. The increase in cash provided was partially offset by repayments of $200.0 million on our revolving credit facility under the Credit Agreement.
74
Unsecured Revolving Credit Facility
In June 2018, we entered into the 2018 Credit Agreement, which provides for an unsecured revolving credit facility of up to $1.5 billion. On June 27, 2018, we borrowed $250.0 million under this facility and used the funds to repay outstanding indebtedness under the existing credit agreement (the 2016 Credit Agreement). In January 2019, we borrowed an additional $800.0 million under this facility and used the funds for an upfront payment related to the global license agreement with Arena. Later in 2019, we paid down $200.0 million on this facility. The aggregate balance of $850.0 million remained outstanding as of December 31, 2019 and February 26, 2020. Refer to Note 7—Debt—2018 Credit Agreement, to our consolidated financial statements.
Contractual Obligations
At December 31, 2019, we had the following contractual obligations (in millions):
Payments Due by Period | |||||||||||||||
Less than | More than | ||||||||||||||
| Total | 1 year | 2-3 Years | 4-5 Years | 5 Years | ||||||||||
Operating lease obligations | $ | 6.5 | $ | 2.1 | $ | 2.7 | $ | 1.1 | $ | 0.6 | |||||
Current and long-term debt obligations(1) |
| 961.4 |
| 281.2 |
| 45.8 |
| 634.4 |
| — | |||||
Obligations under the STAP(2) |
| 29.6 |
| 29.6 |
| — |
| — |
| — | |||||
Obligations under the SERP(3) |
| 84.6 |
| 17.5 |
| — |
| 22.3 |
| 44.8 | |||||
Purchase obligations(4) |
| 415.9 |
| 257.7 |
| 117.9 |
| 22.3 |
| 18.0 | |||||
Total(5) | $ | 1,498.0 | $ | 588.1 | $ | 166.4 | $ | 680.1 | $ | 63.4 | |||||
| (1) | Current and long-term debt obligations include future principal and interest payments on our LIBOR-based variable rate obligations under the 2018 Credit Agreement, assuming contractual maturity of the 2018 Credit Agreement. The 2018 Credit Agreement will mature June 2024, unless it is extended pursuant to its terms. Although our 2018 Credit Agreement matures in 2024, we classified $250.0 million of the outstanding balance as a current liability on our consolidated balance sheet as of December 31, 2019, as we intend to repay this amount within one year. We have included the current portion of $250.0 million in the “Less than 1 year” category within the table above. Refer to Note 7—Debt to our consolidated financial statements for further details. |
| (2) | Estimated based on the intrinsic value of exercisable outstanding STAP awards as of December 31, 2019. Refer to Note 9—Share-Based Compensation to our consolidated financial statements for further details. |
| (3) | Consists of actuarially derived, undiscounted, estimated future payouts of benefits. Refer to Note 12—Employee Benefit Plans—Supplemental Executive Retirement Plan to our consolidated financial statements for further details. |
| (4) | Purchase obligations primarily include: (1) commitments related to research and development (including clinical trials) for new and existing products; (2) open purchase orders for capital expenditures primarily related to our continued investment in construction of additional facilities to support the development and commercialization of our products and technologies; and (3) open purchase orders for the acquisition of goods and services in the ordinary course of business. The timing and amount of our obligations may differ based on certain future events. |
75
| (5) | In addition to amounts in the table above, we are contractually obligated to make payments upon the achievement of various development, regulatory and commercial milestones for agreements we have entered into with third parties. These payments are contingent upon the occurrence of various future events, some of which have a high degree of uncertainty of occurring. These contingent payments have not been included in the table above, and, except with respect to the fair value of the contingent consideration obligations, are not recorded on our consolidated balance sheets. Refer to Note 13—Commitments and Contingencies to our consolidated financial statements for further details. |
Obligations Under License Agreements
Historically, we paid Lilly a five percent royalty on net product sales of Adcirca. In May 2017, we amended our Adcirca license agreement with Lilly. 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. We pay a single-digit percentage royalty based on net product sales of Orenitram under our license agreement with Supernus. We also pay The Scripps Research Institute a one percent royalty on sales of Unituxin. We have entered into other license agreements under which we are required to make milestone payments upon the achievement of certain developmental and commercialization objectives and royalty payments upon the commercialization of products covered by the license agreements. Refer to Note 13—Commitments and Contingencies to our consolidated financial statements for further details.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements within the meaning of Item 303(a)(4) of Regulation S-K.
Summary of Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with generally accepted accounting principles in the United States (GAAP). GAAP requires that we make estimates and assumptions that affect the amounts and timing reported in our consolidated financial statements. As we become aware of updated information or new developments, these estimates and assumptions may change and materially impact reported amounts. We consider the following accounting policies to be critical to our consolidated financial statements because they require the use of our judgment and estimates (including those that are forward-looking) in their application.
Revenue Recognition
We generate revenues from the sale of our five commercial products: Remodulin, Tyvaso, Orenitram, Unituxin and Adcirca. Revenue is recognized when we transfer control of our products to our distributors, as our contracts have a single performance obligation (delivery of our product). These revenues are subject to various product sales allowances, referred to as gross-to-net deductions, which are deducted from revenues to determine net product sales. For a description of our related accounting policies, refer to Note 2—Summary of Significant Accounting Policies—Revenue Recognition in our consolidated financial statements.
The following categories of gross-to-net deductions involve the use of significant estimates and judgments and information obtained from external sources.
76
Rebates and Chargebacks
Our most significant rebates relate to our participation in state Medicaid programs and contractual rebates offered to managed care organizations covering Medicare Part D and commercial plans. Chargebacks relate to our participation in programs with the U.S. Department of Veterans Affairs and 340B covered entities. Although we accrue for our allowance for rebates and chargebacks in the same period that we recognize revenue, the actual rebate or chargeback on the sale of our product to a distributor is not invoiced to us until a future period, generally within six months from the date of sale. Due to this time lag, we must estimate the amount of rebates and chargebacks to accrue. As of December 31, 2019 and 2018, we had a liability of $51.7 million and $54.7 million, respectively, related to rebates and chargebacks.
Estimates associated with our participation in state Medicaid programs are particularly susceptible to adjustment given the extensive time lag that may occur between our recording of an accrual and its ultimate invoicing by individual state Medicaid programs, which can occur up to several years after the sale of our product. Because of the time lag for Medicaid and other rebates, in any particular quarter, our adjustments may incorporate revisions of accruals for prior quarters. Historically, adjustments to our estimates to reflect actual results or updated expectations have not been material to our overall financial results. Provisions attributed to sales in prior periods have been less than one percent of our net product sales for each of the years ended December 31, 2019, 2018 and 2017.
Allowance for Sales Returns
The sales terms for Adcirca and Unituxin include return rights; however, we have not recorded an allowance for returns of Unituxin because our historical returns have been insignificant. For our sales of Adcirca, we record an allowance for returns in the same period that we recognize revenue. Return rights extend throughout the distribution channel and allow for returns of expired product for up to 12 months past the product’s expiration date. As there are generally 24 to 36 months from the initial sale of Adcirca to its expiration date, we must estimate the amount of product that will be returned. Historically, actual returns have not differed materially from our estimates. Following the loss of exclusivity for Adcirca in the second quarter of 2018, we may experience an elevated level of product returns as product inventory remaining in the distribution channel expires. We will remain liable for returns of expired Adcirca product even after our license agreement with Lilly expires on December 31, 2020, after which we will no longer be able to sell Adcirca unless we and Lilly agree to extend the term of our license agreement.
For a roll-forward of the liability accounts associated with our gross-to-net deductions, see the section above entitled Results of Operations—Revenues.
Share-Based Compensation
Our share-based awards are classified as either liabilities (STAP awards) or as equity (stock options, restricted stock units and rights to purchase stock under our employee stock purchase plan). We recognize related share-based compensation expense based on (1) the fair value of outstanding STAP awards on the grant date and at the end of each reporting period; (2) the grant date fair value of stock options and restricted stock units; and (3) the purchase date fair value of stock under our employee stock purchase plan. With the exception of restricted stock units, we estimate the fair value of all share-based awards using the Black-Scholes-Merton valuation model. We measure the fair value of restricted stock units using the stock price on the grant date. Valuation models, like the Black-Scholes-Merton model, require the use of subjective assumptions that could materially impact the estimation of fair value and related compensation expense to be recognized. These assumptions include the expected volatility of our stock price and the expected term of awards. Developing these assumptions requires the use of judgment. For additional information on the assumptions used in the Black-Scholes-Merton valuation model, see Note 9—Share-Based Compensation, to our consolidated financial statements.
77
Performance-Based Stock Options
In March 2017 and March 2018, we issued stock options with performance conditions under the 2015 Plan. The awards have vesting conditions tied to the achievement of specified performance conditions. The performance conditions have target performance levels that span from one to three years. Throughout the performance period, we re-assess the estimated performance and update the number of performance-based awards that we believe will ultimately vest. Upon the conclusion of the performance period, the performance level achieved will be measured and the ultimate number of shares that may vest will be determined. The estimation of future performance requires the use of judgment. Share-based compensation expense for these awards is recorded ratably over their vesting period, depending on the specific terms of the award and achievement of the specified performance conditions.
In-Process Research and Development
As part of our business strategy, we may acquire businesses or in-license the rights to develop and commercialize product candidates. For each in-license transaction, we evaluate whether we have acquired processes or activities along with inputs that would be sufficient to constitute a “business” as defined under GAAP. As defined under GAAP, a “business” consists of inputs and processes applied to those inputs that have the ability to create outputs. Although businesses usually have outputs, outputs are not required for an integrated set of activities to qualify as a business. When we determine that we have not acquired sufficient processes or activities to constitute a business, any up-front payments, as well as pre-commercial milestone payments, are immediately expensed as acquired in-process research and development in the period in which they are incurred. In connection with an exclusive license agreement with Arena, we paid Arena $800.0 million, which was expensed as acquired in-process research and development and included within research and development expenses on our consolidated statements of operations in 2019. Refer to Note 17—Arena License Agreement, to our consolidated financial statements. Milestone payments made to third parties subsequent to regulatory approval are capitalized as intangible assets and amortized over the estimated remaining useful life of the related product.
Acquired businesses are accounted for using the acquisition method of accounting. The acquisition purchase price is allocated to the net assets of the acquired business at their respective fair values. For an acquired business, amounts allocated to in-process research and development (IPR&D) are recorded at fair value and are considered indefinite-lived intangible assets subject to annual impairment testing until completion or abandonment of the research and development efforts. Upon completion of a project, the carrying value of the related IPR&D is reclassified to intangible assets and is amortized over the estimated useful life of the asset. Our fair value assessments are highly reliant on various assumptions which are considered Level 3 inputs, including estimates of future cash flows (including long-term growth rates), discount rates and the probability of achieving the estimated cash flows. In August 2018, we completed the acquisition of SteadyMed and acquired IPR&D related to the development of Trevyent. We determined that the fair value of the acquired IPR&D was $107.3 million.
IPR&D projects acquired in a business combination which have not reached technological feasibility or lack regulatory approval at the time of acquisition are reviewed for impairment annually, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable and upon establishment of technological feasibility or regulatory approval. We determine impairment by comparing the fair value of the asset to its carrying value. If the asset’s carrying value exceeds its fair value, an impairment charge is recorded for the difference and its carrying value is reduced accordingly.
78
Estimating future cash flows of an IPR&D product candidate for purposes of an impairment analysis requires us to make significant estimates and assumptions regarding the amount and timing of costs to complete the project and the amount, timing and probability of achieving revenues from the completed product similar to how the acquisition date fair value of the project was determined, as described above. There are often major risks and uncertainties associated with IPR&D projects as we are required to obtain regulatory approvals in order to be able to market these products. Such approvals require completing clinical trials that demonstrate a product candidate is safe and effective. Consequently, the eventual realized value of the acquired IPR&D project may vary from its fair value at the date of acquisition, and IPR&D impairment charges may occur in future periods which could have a material adverse effect on our results of operations.
Investments in Privately-Held Companies
We have investments in several privately-held companies that have a strategic connection to our business, all of which are non-controlling equity investments in the form of preferred stock. 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 the measurement alternative, the investments are measured at cost, less any impairment, adjusted for any observable price changes. We monitor these investments individually for any observable price changes or impairment indicators. We adjust the measurement of these investments for observable price changes in orderly transactions for the identical or a similar investment of the same issuer. We consider relevant transactions, including any potential funding opportunities, which occur on or before the balance sheet date in evaluating whether any observable price changes have occurred. When a relevant transaction is identified, a careful review of the attendant rights and obligations is necessary to evaluate whether such transaction is deemed to be a similar or identical investment.
At each reporting date, we review these investments individually for impairment by evaluating whether events or circumstances have occurred that may have a significant adverse effect on the fair value of the investments. If such events or circumstances have occurred, we will estimate the fair value of the investment. In such cases, we determine the estimated fair value of the investment using unobservable inputs including assumptions by the company’s management. Because several of these companies are in the early startup or development stages, these entities are more likely to be subject to potential changes in cash flows, valuation, and ability to attract new investors which may be necessary for the liquidity needed to support their operations. If we determine that a decline in the value of an investment has occurred, we recognize an impairment loss in the period in which the decline occurs. If our percentage ownership increases or our ability to direct or control management increases, we could be required to account for one or more of these investments under the equity method of accounting or consolidate the company’s operations for financial accounting purposes. Refer to Note 4—Investments—Investments in Privately-Held Companies, to our consolidated financial statements.
Recently Issued Accounting Standards
See Note 3—Recently Issued Accounting Standards, to our consolidated financial statements for information on our anticipated adoption of recently issued accounting standards.
79
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment Risk
As of December 31, 2019, we have invested $1.5 billion in corporate debt securities and U.S. government and agency securities. The market value of these investments varies inversely with changes in prevailing market interest rates. In general, as interest rates increase, the market value of a debt investment would be expected to decrease. Conversely, as interest rates decrease, the market value of a debt investment would be expected to increase. To date, we have not experienced significant volatility in the value of these investments. However, to address market risk, we invest in debt securities with terms no longer than three years and typically hold these investments to maturity so that they can be redeemed at their stated or face value. Many of our investments may be called by their respective issuers prior to maturity. The following table summarizes the expected maturities and weighted average interest rates as of December 31, 2019 (dollars in millions):
Expected Maturity |
| |||||||||
| 2020 |
| 2021 |
| 2022 |
| ||||
Available-for-sale investments | $ | 684.5 | $ | 514.2 | $ | 253.3 | ||||
Weighted average interest rate |
| 1.8 | % |
| 2.0 | % |
| 2.0 | % | |
During sustained periods of instability and uncertainty in the financial markets, we may be subjected to additional investment-related risks that could materially affect the value and liquidity of our investments. In light of these risks, we actively monitor market conditions and developments specific to the securities and security classes in which we invest. In addition, we believe that we maintain a conservative investment approach in that we invest exclusively in unstructured, highly-rated securities with relatively short maturities that we believe reduce our exposure to undue risks. While we believe we take prudent measures to mitigate investment related risks, such risks cannot be fully eliminated, as circumstances can occur that are beyond our control.
Interest Rate Risk
As of December 31, 2019 and 2018, we had $850.0 million and $250.0 million aggregate principal amounts, respectively, outstanding under our 2018 Credit Agreement, which bears interest at a variable rate. As a result, we are subject to interest rate risk with respect to such floating-rate debt. A 100 basis point increase in the variable interest rate component of our borrowings would increase our annual interest expense by approximately $8.5 million or 19 percent, and $2.5 million or 18 percent, for the years ended December 31, 2019 and 2018, respectively. Refer to Note 7—Debt—2018 Credit Agreement, to our consolidated financial statements.
Stock Price Risk
As of December 31, 2019 and 2018, we had 2.6 million and 2.9 million awards outstanding under our Share Tracking Awards Plans, respectively. These awards are referred to as “STAP awards.” STAP awards convey the right to receive in cash an amount equal to the appreciation of our common stock, which is measured as the increase in the closing price of our common stock between the dates of grant and exercise. As of December 31, 2019 and 2018, the aggregate STAP awards liability balance was $25.0 million and $72.2 million, respectively. 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 share-based 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. As of December 31, 2019 and 2018, a one dollar change in our stock price would, holding other factors constant, increase or decrease the fair value of our STAP awards liability by approximately $1.1 million and $1.8 million, respectively.
80
As of December 31, 2019 and 2018, we held investments in equity securities with readily determinable fair values of $63.0 million and $3.5 million, respectively, which are included in current marketable investments on our consolidated balance sheets. Our investments in these publicly-traded equity securities are recorded at fair value and are subject to market price volatility. Changes in the fair value of these investments are recorded on our consolidated statement of operations within other income (expense), net. As of December 31, 2019 and 2018, a price change of 10 percent would increase or decrease the fair value of these investments by $6.3 million and $0.4 million, respectively.
81
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UNITED THERAPEUTICS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of United Therapeutics Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of United Therapeutics Corporation (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2020, expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note 3 to the consolidated financial statements, the Company changed its method for accounting for lease arrangements in 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), and the amendments in ASU 2018-11.
Adoption of ASU No. 2014-09
As discussed in Note 3 to the consolidated financial statements, the Company changed its method for accounting for revenue in 2018 due to the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-08, 2016-10, 2016-12, 2016-20 and 2017-14.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
F-2
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements; and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters on the accounts or disclosures to which they relate.
Revenue Reductions - Accounting for rebates and sales returns | ||
Description of the Matter | At December 31, 2019, accrued rebates and chargebacks were $51.7 million, a portion of which relates to rebates, and accrued sales returns were $14.2 million, and the Company recognized $178.7 million in revenue reductions associated with rebates and chargebacks during the year ended December 31, 2019. As discussed in Note 2 to the consolidated financial statements, the Company recognizes revenues net of rebates and sales returns reserves, commonly referred to as “revenue reductions” or “gross-to-net deductions.” Allowances for rebates include mandated discounts due to the Company’s participation in various government health care programs and contracted discounts with commercial payers. The Company estimates accrued rebates on a product-by-product basis, considering actual revenue, contractual discount rates, expected utilization under each contract, historical payment experience and changes in product pricing and information regarding changes in program regulations and guidelines. The Company accrues for rebates in the same period the product is sold; however, third-party reporting and payment of the rebate amount occur on a time lag. Terms for sales of Adcirca include a right of return. The Company’s sales return estimate considers the estimated quantity of Adcirca inventory in the distribution channel and the amount that ultimately will not be sold by distributors. The Company’s Adcirca sales return estimate was developed using reports from the Company’s distributors and other third-party data. Auditing rebates and sales returns reserves is complex due to the time lag associated with third-party reporting of rebate amounts, calculations of government pricing used to determine the rebate price, and the judgmental nature of assumptions (e.g., forecasted sales and forecasted demand) utilized in determining the sales return estimate. The complexities associated with government pricing calculations required the involvement of specialists. |
F-3
How We Addressed the Matter in Our Audit | We tested controls that address the risks of material misstatement relating to the measurement and valuation of rebates and sales returns reserves. For example, we tested controls over management’s review of the accrued rebate and sales returns calculations, including the significant assumptions and data inputs provided by third parties. To test rebates, our audit procedures included, among others, evaluating the methodologies and assumptions used and the underlying data used by the Company. We evaluated the assumptions used by management against historical trends, evaluated the change in estimated accruals from the prior periods, and assessed the historical accuracy of the Company’s estimates against actual results. We performed substantive analytics disaggregated by product. We utilized government pricing specialists in evaluating the Company’s government pricing methodology and calculations of government prices used to estimate rebates for a sample of the Company’s products. To test sales returns, our audit procedures included, among others, evaluating the methodologies and assumptions used and the underlying data used by the Company. We clerically tested the calculation and assessed changes in the Company’s significant assumptions and compared current assumptions to those utilized in historical periods. We evaluated the accuracy of the Company’s estimate of significant assumptions through a comparison of estimated amounts to actual results. |
Arena Pharmaceuticals, Inc. (Arena) exclusive license agreement | ||
Description of the Matter | During the year ended December 31, 2019, the Company recognized $800.0 million as acquired in-process research and development expense. As discussed in Note 17 to the consolidated financial statements, the Company entered into an exclusive license agreement with Arena related to ralinepag. The Company paid Arena an upfront payment of $800.0 million. For in-license transactions, the Company evaluated whether the acquisition of ralinepag would be considered the acquisition of a “business”. When the Company determines a business has not been acquired, up-front payments, as well as pre-commercial milestone payments, are immediately expensed as acquired in-process research and development in the period in which they are incurred. Auditing acquired in-process research and development is complex due to the subjective nature of determining whether the acquired asset includes processes and/or activities with inputs that would be sufficient to constitute a business combination rather than an asset acquisition. The determination has a significant impact on the accounting for the transaction and related disclosures. | |
How We Addressed the Matter in Our Audit | We tested controls that address the risks of material misstatement relating to the assessment of the arrangement as a business combination or asset acquisition. For example, we tested controls over management’s review and evaluation of the transaction in accordance with the required accounting literature. To test the acquired in-process research and development, our audit procedures included, among others, evaluating the accounting conclusions reached by the Company, which included an assessment of the nature and structure of the transaction to determine if there were processes and/or activities with inputs that would be sufficient to constitute a business. |
F-4
Valuation of investments in privately held companies | ||
Description of the Matter | At December 31, 2019, included with the Company’s other non-current assets were $86.0 million of investments in privately held companies. As discussed in Note 2 to the consolidated financial statements, the Company measured these investments using the measurement alternative because the fair values of the investments are not readily determinable. Under the measurement alternative, investments are measured at cost, less any impairment, adjusted for any observable price changes in an orderly transaction for the identical or similar investment of the same issuer. Auditing investments in privately held companies is complex due to the subjectivity in assessing whether observable price changes have occurred for investments that are similar to the investment the Company holds in the same issuer. | |
How We Addressed the Matter in Our Audit | We tested controls that address the risks of material misstatement related to the assessment of whether an observable price change in an orderly transaction was for an identical or similar investment of the same issuer. To test the valuation of investments in privately held companies, our audit procedures included, among others, evaluating the accounting conclusions reached by the Company, which included an assessment of whether observable transactions were identical or substantially similar to the investment the Company holds in the same issuer for transactions that occurred during the year. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2003.
Tysons, Virginia
February 26, 2020
F-5
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of United Therapeutics Corporation
Opinion on Internal Control over Financial Reporting
We have audited United Therapeutics Corporation’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, United Therapeutics Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019 and the related notes and financial statement schedule of the Company listed in the Index at Item 15(a)(2) and our report dated February 26, 2020, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
F-6
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Tysons, Virginia
February 26, 2020
F-7
UNITED THERAPEUTICS CORPORATION
Consolidated Balance Sheets
(In millions, except share and per share data)
December 31, | ||||||
| 2019 |
| 2018 | |||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Marketable investments |
| |
| | ||
Accounts receivable, |
| |
| | ||
Inventories, net | | | ||||
Other current assets |
| |
| | ||
Total current assets |
| |
| | ||
Marketable investments |
| |
| | ||
Goodwill and other intangible assets, net |
| |
| | ||
Property, plant and equipment, net |
| |
| | ||
Deferred tax assets, net |
| |
| | ||
Other non-current assets |
| |
| | ||
Total assets | $ | | $ | | ||
Liabilities and Stockholders’ Equity | ||||||
Current liabilities: | ||||||
Accounts payable and accrued expenses | $ | | $ | | ||
Line of credit (current) |
| |
| — | ||
Share tracking awards plan |
| |
| | ||
Other current liabilities |
| |
| | ||
Total current liabilities |
| |
| | ||
Line of credit (non-current) | | | ||||
Other non-current liabilities |
| |
| | ||
Total liabilities |
| |
| | ||
Commitments and contingencies—Note 13 | ||||||
Temporary equity |
| — |
| | ||
Stockholders’ equity: | ||||||
Preferred stock, par value $ |
|
| ||||
Series A junior participating preferred stock, par value $ |
|
| ||||
Common stock, par value $ |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Treasury stock, |
| ( |
| ( | ||
Retained earnings |
| |
| | ||
Total stockholders’ equity |
| |
| | ||
Total liabilities and stockholders’ equity | $ | | $ | | ||
See accompanying notes to consolidated financial statements.
F-8
UNITED THERAPEUTICS CORPORATION
Consolidated Statements of Operations
(In millions, except per share data)
Year Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Revenues: | |||||||||
Net product sales | $ | | $ | | $ | | |||
Total revenues |
| |
| |
| | |||
Operating expenses: | |||||||||
Cost of product sales |
| |
| |
| | |||
Research and development |
| |
| |
| | |||
Selling, general and administrative |
| |
| |
| | |||
Settlement of loss contingency | — | — | | ||||||
Total operating expenses |
| |
| |
| | |||
Operating (loss) income |
| ( |
| |
| | |||
Interest income |
| |
| |
| | |||
Interest expense | ( | ( | ( | ||||||
Other income (expense), net |
| |
| ( |
| | |||
Impairments of investments in privately-held companies | — | ( | ( | ||||||
Total other income (expense), net |
| |
| ( |
| ( | |||
(Loss) income before income taxes |
| ( |
| |
| | |||
Income tax benefit (expense) |
| |
| ( |
| ( | |||
Net (loss) income | $ | ( | $ | | $ | | |||
Net (loss) income per common share: | |||||||||
Basic | $ | ( | $ | | $ | | |||
Diluted | $ | ( | $ | | $ | | |||
Weighted average number of common shares outstanding: | |||||||||
Basic |
| |
| |
| | |||
Diluted |
| |
| |
| | |||
See accompanying notes to consolidated financial statements.
F-9
UNITED THERAPEUTICS CORPORATION
Consolidated Statements of Comprehensive Income
(In millions)
Year Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Net (loss) income | $ | ( | $ | | $ | | |||
Other comprehensive (loss) income: | |||||||||
Foreign currency translation gains |
| — |
| — |
| | |||
Defined benefit pension plan: | |||||||||
Actuarial (loss) gain arising during period, net of tax |
| ( |
| |
| ( | |||
Amortization of actuarial gain and prior service cost included in net periodic pension cost and settlement, net of tax |
| ( |
| |
| | |||
Total defined benefit pension plan, net of tax |
| ( |
| |
| ( | |||
Unrealized gain (loss) on available-for-sale securities, net of tax |
| |
| ( |
| ( | |||
Other comprehensive (loss) income, net of tax |
| ( |
| |
| ( | |||
Comprehensive (loss) income | $ | ( | $ | | $ | | |||
See accompanying notes to consolidated financial statements.
F-10
UNITED THERAPEUTICS CORPORATION
Consolidated Statements of Stockholders’ Equity
(In millions)
Accumulated | ||||||||||||||||||||
Additional | Other | |||||||||||||||||||
Common Stock | Paid-in | Comprehensive | Treasury | Retained | Stockholders’ | |||||||||||||||
| Shares |
| Amount |
| Capital |
| Loss |
| Stock |
| Earnings |
| Equity | |||||||
Balance, December 31, 2016 | | $ | | $ | | $ | ( | $ | ( | $ | | $ | | |||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| |
| | ||||||
Foreign currency translation adjustments |
| — |
| — |
| — |
| |
| — |
| — |
| | ||||||
Unrealized loss on available-for-sale securities |
| — |
| — |
| — |
| ( |
| — |
| — |
| ( | ||||||
Defined benefit pension plan |
| — |
| — |
| — |
| ( |
| — |
| — |
| ( | ||||||
Shares issued under employee stock purchase plan |
| |
| — |
| |
| — |
| — |
| — |
| | ||||||
Shares issued upon expiration of warrants | — | — | ( | — | | — | — | |||||||||||||
Repurchase of shares | — | — | | — | ( | — | ( | |||||||||||||
Exercise of stock options |
| |
| — |
| |
| — |
| — |
| — |
| | ||||||
Share-based compensation |
| — |
| — |
| |
| — |
| — |
| — |
| | ||||||
Cumulative effect of accounting change |
| — |
| — |
| |
| — |
| — |
| ( |
| ( | ||||||
Consolidation of variable interest entity |
| — |
| — |
| |
| — |
| — |
| — |
| | ||||||
Balance, December 31, 2017 |
| | | | ( | ( | | | ||||||||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| |
| | ||||||
Unrealized loss on available-for-sale securities | — |
| — |
| — |
| ( |
| — |
| — |
| ( | |||||||
Defined benefit pension plan |
| — |
| — |
| — |
| |
| — |
| — |
| | ||||||
Shares issued under employee stock purchase plan |
| — |
| — |
| |
| — |
| — |
| — |
| | ||||||
Restricted stock units withheld for taxes | — |
| — |
| ( |
| — |
| — |
| — |
| ( | |||||||
Exercise of stock options |
| |
| — |
| |
| — |
| — |
| — |
| | ||||||
Share-based compensation |
| — | — | | — | — | — | | ||||||||||||
Balance, December 31, 2018 |
| | | | ( | ( | | | ||||||||||||
Net loss |
| — | — | — | — | — | ( | ( | ||||||||||||
Unrealized gain on available-for-sale securities | — |
| — |
| — |
| |
| — |
| — |
| | |||||||
Defined benefit pension plan |
| — |
| — |
| — |
| ( |
| — |
| — |
| ( | ||||||
Shares issued under employee stock purchase plan |
| — |
| — |
| |
| — |
| — |
| — |
| | ||||||
Common stock issued for RSUs vested | | — | — | — | — | — | — | |||||||||||||
Restricted stock units withheld for taxes | — |
| — |
| ( |
| — |
| — |
| — |
| ( | |||||||
Exercise of stock options |
| |
| — |
| |
| — |
| — |
| — |
| | ||||||
Share-based compensation |
| — | — | | — | — | — | | ||||||||||||
Cumulative effect of accounting change | — | — | — | — | — | ( | ( | |||||||||||||
Reclassification from temporary equity to permanent equity(1) | — | — | | — | — | — | | |||||||||||||
Deconsolidation of variable interest entity | — | — | ( | — | — | — | ( | |||||||||||||
Balance, December 31, 2019 |
| | $ | | $ | | $ | ( | $ | ( | $ | | $ | | ||||||
| (1) | Pursuant to a license agreement with Toray Industries Inc. (Toray), we issued |
See accompanying notes to consolidated financial statements.
F-11
UNITED THERAPEUTICS CORPORATION
Consolidated Statements of Cash Flows
(In millions)
Year Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Cash flows from operating activities: | |||||||||
Net (loss) income | $ | ( | $ | | $ | | |||
Adjustments to reconcile net (loss) income to net cash (used in)/provided by operating activities: | |||||||||
Depreciation and amortization |
| |
| |
| | |||
Share-based compensation expense (benefit) |
| |
| ( |
| | |||
Impairments of investments in privately-held companies | — | | | ||||||
Asset impairment charges |
| |
| — |
| — | |||
Other | ( | | ( | ||||||
Changes in operating assets and liabilities: | |||||||||
Accounts receivable |
| |
| |
| ( | |||
Inventories |
| |
| |
| ( | |||
Accounts payable and accrued expenses |
| ( |
| ( |
| | |||
Other assets and liabilities |
| ( |
| |
| ( | |||
Net cash (used in) provided by operating activities |
| ( |
| |
| | |||
Cash flows from investing activities: | |||||||||
Purchases of property, plant and equipment |
| ( |
| ( |
| ( | |||
Proceeds from sale of property, plant and equipment | — | — | | ||||||
Deposits | — | ( | — | ||||||
Purchases of held-to-maturity and other investments |
| — |
| ( |
| ( | |||
Sales/maturities of held-to-maturity investments |
| |
| |
| | |||
Purchases of available-for-sale investments | ( | ( | ( | ||||||
Sales/maturities of available-for-sale investments | | | | ||||||
Sales of investments in equity securities | | — | — | ||||||
Purchases of investments in privately-held companies |
| ( |
| ( |
| ( | |||
Decrease in cash due to deconsolidation of variable interest entity | ( | — | — | ||||||
Consolidation of variable interest entity | — | — | | ||||||
Acquisition, net of cash acquired | — | ( | — | ||||||
Net cash used in investing activities |
| ( |
| ( |
| ( | |||
Cash flows from financing activities: | |||||||||
Proceeds from line of credit | | | | ||||||
Repayment of line of credit | ( | ( | — | ||||||
Payments of debt issuance costs |
| ( |
| ( |
| ( | |||
Payments to repurchase common stock | — | — | ( | ||||||
Proceeds from the exercise of stock options |
| |
| |
| ||||
Proceeds from the issuance of stock under employee stock purchase plan |
| |
| |
| | |||
Restricted stock units withheld for taxes |
| ( |
| — |
| — | |||
Net cash provided by financing activities |
| |
| |
| | |||
Effect of exchange rate changes on cash and cash equivalents |
| — |
| — |
| | |||
Net increase (decrease) in cash and cash equivalents |
| |
| ( |
| ( | |||
Cash and cash equivalents, beginning of year |
| |
| |
| | |||
Cash and cash equivalents, end of year | $ | | $ | | $ | | |||
Supplemental cash flow information: | |||||||||
Cash paid for interest | $ | | $ | | $ | | |||
Cash paid for income taxes | $ | | $ | | $ | | |||
Cash paid for settlement of loss contingency | $ | — | $ | — | $ | | |||
Non-cash investing and financing activities: | |||||||||
Non-cash additions to property, plant and equipment | $ | | $ | | $ | | |||
See accompanying notes to consolidated financial statements.
F-12
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), Orenitram® (treprostinil) Extended-Release Tablets (Orenitram), Unituxin® (dinutuximab) Injection (Unituxin) and Adcirca® (tadalafil) Tablets (Adcirca). Our only significant revenues outside the United States are derived from sales of Remodulin in Europe.
As used in these notes to our 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. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements of United Therapeutics Corporation and its consolidated subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of our consolidated financial statements in accordance with GAAP requires our management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on assumptions regarding historical experience, currently available information and anticipated developments that we believe are reasonable and appropriate. However, because the use of estimates involves an inherent degree of uncertainty, actual results could differ from those estimates. Estimates are used for, but not limited to, revenue recognition, share-based compensation, determining the fair value of assets acquired and liabilities assumed in business combinations, marketable investments, fair value measurements (including those related to contingent consideration), inventory reserves, investments in privately-held companies, income taxes, goodwill and other intangible assets, and obligations related to our Supplemental Executive Retirement Plan.
Fair Value Measurements
Fair value is a market-based measurement, not an entity-specific measurement. The objective of a fair value measurement is to estimate the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Such transactions to sell an asset or transfer a liability are assumed to occur in the principal market for that asset or liability, or in the absence of the principal market, the most advantageous market for the asset or liability.
F-13
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
Assets and liabilities subject to fair value measurement disclosures are required to be classified according to a three-level fair value hierarchy with respect to the inputs (or assumptions) used to determine fair value. The level in which an asset or liability is disclosed within the fair value hierarchy is based on the lowest level input that is significant to the related fair value measurement in its entirety. The guidance under the fair value measurement framework applies to other existing accounting guidance in the Financial Accounting Standards Board (FASB) codification that requires or permits fair value measurements. Refer to related disclosures in Note 5—Fair Value Measurements.
Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of three months or less from the date of acquisition.
Marketable Investments
Our marketable investments are primarily debt securities that we classify as available-for-sale. If we have both the positive intent and the ability to hold the securities until maturity, the securities are classified as held-to-maturity. We determine the appropriate classification of the securities at the time they are acquired and evaluate the appropriateness of such classifications at each balance sheet date. Available-for-sale debt securities are recorded at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive (loss) income in stockholders’ equity, until realized. Held-to-maturity debt securities are recorded at amortized cost, adjusted for the amortization of discounts or premiums. Related discounts and premiums are amortized over the term of these securities as an adjustment to the yield using the effective interest method. Marketable investments are classified as either current or non-current assets on our consolidated balance sheets based on their contractual maturity dates.
We monitor our investment portfolio for impairment quarterly or more frequently if circumstances warrant. In the event that the carrying value of a debt security exceeds its fair value and the decline in value is determined to be other-than-temporary, we record an impairment charge within earnings attributable to the estimated credit loss. In determining whether a decline in the value of an investment is other-than-temporary, we evaluate currently available factors that may include, among others: (1) general market conditions; (2) the duration and extent to which fair value has been less than the carrying value; (3) the investment issuer’s financial condition and business outlook; and (4) our assessment as to whether it is more likely than not that we will be required to sell a security prior to recovery of its amortized cost basis.
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):
As of December 31, | ||||||
| 2019 |
| 2018 | |||
Raw materials | $ | | $ | | ||
Work-in-progress |
| |
| | ||
Finished goods |
| |
| | ||
Total inventories | $ | | $ | | ||
F-14
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
Goodwill and Other Intangible Assets
The carrying amount of goodwill is not amortized but is subject to annual impairment testing. We conduct our impairment testing of goodwill annually during the fourth quarter, or more frequently if impairment indicators exist. Initially, we evaluate various pertinent qualitative factors to assess whether it is more likely than not that the fair value of a reporting unit to which goodwill has been assigned is less than its carrying value. Such qualitative factors can include, among others: (1) industry and market conditions; (2) present and anticipated sales and cost factors; and (3) overall financial performance. If we conclude based on our qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we then measure the fair value of the reporting unit and compare its fair value to its carrying value (Step 1 of the goodwill impairment test). If the carrying amount of the reporting unit exceeds its fair value, then the amount of an impairment loss, if any, is measured as the excess of the recorded amount of goodwill over its implied fair value (Step 2 of the goodwill impairment test). We used a qualitative assessment for our goodwill impairment testing for 2019 and 2018. During the year ended December 31, 2019, we wrote off $
Indefinite-lived intangible assets are not amortized but are evaluated annually or more frequently for impairment if impairment indicators exist. Our indefinite-lived intangible assets include purchased in-process research and development (IPR&D) assets, which were measured at their estimated fair values as of their acquisition dates. We used a qualitative assessment for our indefinite-lived intangible asset impairment testing. During the year ended December 31, 2019, we recognized an impairment charge of $
Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. Impairment losses are measured and recognized to the extent the carrying value of such assets exceeds their fair value. We recorded
Goodwill and other intangible assets comprise the following (in millions):
As of December 31, 2019 | As of December 31, 2018 | |||||||||||||||||
Accumulated | Accumulated | |||||||||||||||||
| Gross |
| Amortization |
| Net |
| Gross |
| Amortization |
| Net | |||||||
Goodwill | $ | | $ | — | $ | | $ | | $ | — | $ | | ||||||
Other intangible assets: | ||||||||||||||||||
Technology, patents and trade names |
| |
| ( |
| |
| |
| ( |
| | ||||||
In-process research and development(1) | | — | | | — | | ||||||||||||
Total | $ | | $ | ( | $ | | $ | | $ | ( | $ | | ||||||
| (1) | In 2018, we determined the fair value of an IPR&D asset resulting from our acquisition of SteadyMed Ltd. 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. |
F-15
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
In June 2019, we elected to terminate our license agreement with the variable interest entity (VIE) discussed under Note 4—Investments—Deconsolidation of a Variable Interest Entity. Because we will not pursue further development of the related IPR&D asset, we fully impaired the IPR&D asset, recognizing an impairment charge of $
Related amortization expense for the years ended December 31, 2019, 2018 and 2017, was $
Property, Plant and Equipment
Property, plant and equipment is recorded at cost and depreciated over its estimated useful life using the straight-line method. The estimated useful lives of property, plant and equipment by major category are as follows:
Land improvements |
| |
Buildings | ||
Building improvements |
| |
Furniture, equipment and vehicles |
| |
Leasehold improvements |
| Remaining lease term, or the estimated useful life of the improvement, whichever is shorter |
Property, plant and equipment consists of the following (in millions):
As of December 31, | ||||||
| 2019 |
| 2018 | |||
Land and land improvements | $ | | $ | | ||
Buildings, building improvements and leasehold improvements |
| |
| | ||
Buildings under construction |
| |
| | ||
Furniture, equipment and vehicles |
| |
| | ||
| |
| | |||
Less—accumulated depreciation |
| ( |
| ( | ||
Property, plant and equipment, net | $ | | $ | | ||
Depreciation expense for the years ended December 31, 2019, 2018 and 2017, was $
In connection with the completion of construction in the third quarter of 2019 of a building we own, we leased part of the space in the building to another entity as part of a broader collaboration. In 2019, we reclassified $
F-16
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
Buildings under construction consists of direct costs related to our construction projects.
Investments in Privately-Held Companies
We measure our non-controlling equity investments in privately-held companies 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. We monitor these investments individually for any observable price changes or impairment indicators. We adjust the measurement of these investments for observable price changes in orderly transactions for the identical or a similar investment of the same issuer. We consider relevant transactions, including any potential funding opportunities, which occur on or before the balance sheet date in evaluating whether any observable price changes have occurred. When a relevant transaction is identified, a careful review of the attendant rights and obligations is necessary to evaluate whether such transaction is deemed to be a similar or identical investment. 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. At each reporting date, we review these investments individually for impairment by evaluating whether events or circumstances have occurred that may have a significant adverse effect on the fair value of the investments. If such events or circumstances have occurred, we will estimate the fair value of the investment. In such cases, we determine the estimated fair value of the investment using unobservable inputs including assumptions by the company’s management.
Treasury Stock
Repurchased treasury stock is recorded at cost, including commissions and fees. The cost of treasury shares sold or reissued is determined using the first-in, first-out method. Related gains and losses on sales of treasury stock are recognized as adjustments to stockholders’ equity.
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.
To determine revenue recognition for contractual arrangements that we determine are within the scope of Topic 606, we perform the following five steps: (1) identify each contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to our performance obligations in the contract; and (5) 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.
F-17
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
We generate revenues from the sale of our
See Note 14—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 to which we are entitled in exchange for the sale of our products to our distributors, and include reserves for: (1) rebates and chargebacks; (2) prompt payment discounts; (3) allowance for sales 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. We recognized an aggregate $
F-18
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
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
Prompt payment discounts. We offer prompt pay discounts to many of our distributors, typically for payments made within
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
For Unituxin, we ship product with expiration dates that are generally
F-19
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
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
Adcirca
Adcirca is manufactured for us by Lilly and distributed through its pharmaceutical wholesaler network on our behalf. 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.
Research and Development
Research and development costs are expensed as incurred except for refundable payments made in advance of services to be provided to us. Related expenses consist of internal labor and overhead, costs to acquire pharmaceutical products and product rights for development, materials used in clinical trials and amounts paid to third parties for services and materials related to drug development and clinical trials.
As part of our business strategy, we may in-license the rights to develop and commercialize product candidates. For each in-license transaction, we evaluate whether we have acquired processes or activities along with inputs that would be sufficient to constitute a “business” as defined under GAAP. As defined under GAAP, a “business” consists of inputs and processes applied to those inputs that have the ability to create outputs. Although businesses usually have outputs, outputs are not required for an integrated set of activities to qualify as a business. When we determine that we have not acquired sufficient processes or activities to constitute a business, any up-front payments, as well as pre-commercial milestone payments, are immediately expensed as acquired IPR&D in the period in which they are incurred. Milestone payments made to third parties subsequent to regulatory approval are capitalized as intangible assets and amortized over the estimated remaining useful life of the related product.
F-20
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
We recognize the following costs, among others, as research and development expense in the period related costs are incurred:
| ● | costs associated with in-house or contracted manufacturing activities prior to receiving FDA approval for such facilities, or for major unproven changes to our manufacturing processes; |
| ● | costs incurred in-licensing the rights to technologies in the research and development stage that have no alternative future use; and |
| ● | up-front payments made in connection with arrangements to obtain license and distribution rights to pharmaceutical product candidates prior to regulatory approval, absent any alternative future use. |
Share-Based Compensation
Generally, the fair value of a stock option grant is measured on its grant date and related compensation expense is recognized ratably over the requisite service period. We issue new shares of our common stock upon the exercise of stock options. Additionally, certain executives have stock options with performance conditions that have vesting rights tied to achievement of specific targeted criteria. Share-based compensation expense for all awards is recorded ratably over their vesting period, depending on the specific terms of the award and achievement of the specified performance conditions. Refer to Note 9—Share-Based Compensation.
We measure the fair value of restricted stock units using the stock price on the date of grant and related compensation expense is recognized ratably over the vesting period. Each restricted stock unit entitles the holder to receive
Awards under our share tracking awards plans require cash settlement upon exercise and are classified as a liability. Accordingly, the fair value of related cash-settled awards is re-measured at each reporting date until awards are exercised or are otherwise no longer outstanding. Related changes in the fair value of outstanding cash-settled awards at each financial reporting date are recognized as adjustments to share-based compensation expense.
We measure the fair value of stock to be purchased through our employee stock purchase plan at the beginning of an offering period, or grant date, and recognize related compensation expense ratably over the requisite service period (the offering period). We issue new shares of our common stock upon the end of each offering period, or exercise date.
Income Taxes
We account for income taxes in accordance with the asset and liability method. Under this method, we determine deferred tax assets and liabilities based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect for years in which the temporary differences are expected to reverse. We apply a valuation allowance against any net deferred tax asset if, based on the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
F-21
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (Continued)
We recognize the benefit of an uncertain tax position that has been taken or that we expect to take on income tax returns only if such tax position is more likely than not to be sustained. We recognize the benefit in an amount equal to the largest amount that we determine has a greater than 50 percent likelihood of being realized upon settlement. The ultimate resolution of uncertain tax positions could result in amounts different from those recognized in our consolidated financial statements.
Earnings per Share
Basic (loss) earnings per share is computed by dividing net (loss) income by the weighted average number of shares of common stock outstanding during the period. Diluted (loss) earnings per common share is computed by dividing net (loss) income by the weighted average number of shares of common stock outstanding during the period, plus the potential dilutive effect of other securities if such securities were converted or exercised. During periods in which we incur net losses, both basic and diluted loss per share are calculated by dividing the net loss by the weighted average shares outstanding. Potentially dilutive securities are excluded from the calculation because their effect would be anti-dilutive.
Concentration of Credit Risk
Financial instruments that are exposed to credit risk consist of cash, money market funds, certificates of deposit, marketable debt securities, and trade receivables. We maintain our cash and money market funds with financial institutions that are federally insured. While balances deposited in these institutions often exceed Federal Deposit Insurance Corporation limits, we have not experienced any losses on related accounts to date. Furthermore, we limit our risk exposure by maintaining funds in financial institutions that we believe are creditworthy and financially sound. Our investments in marketable debt securities have been issued by corporate entities and government-sponsored enterprises with high credit ratings. We mitigate investment risks by investing in highly-rated securities with relatively short maturities that we believe do not subject us to undue investment or credit risk. In addition, our investment policy does not provide for investments in complex or structured financial instruments. At any given time, our trade receivables are concentrated among a small number of principal customers. If any of these financial institutions, issuers or customers fail to perform their obligations under the terms of these financial instruments, our maximum exposure to potential losses would be equal to amounts reported on our consolidated balance sheets.
F-22
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
3. Recently Issued Accounting Standards
Accounting Standards Adopted
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (ASU 2016-02), which requires that assets and liabilities arising under leases be recognized on the balance sheets. ASU 2016-02 also requires additional quantitative and qualitative disclosures of the amount, timing and uncertainty of cash flows relating to lease arrangements. ASU 2016-02 was 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 a simplified 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. We adopted this standard on January 1, 2019 using the simplified transition method, allowing us to not restate comparative periods and apply ASC 842 on a prospective basis, resulting in a balance sheet presentation that, in certain respects, is not comparable to the prior period in the first year of adoption. We elected the practical expedient package permitted under the transition guidance within the new standard, which among other things, allows us to carry forward historical lease classifications. We also elected to use the lessee component election, allowing us to account for the lease and non-lease components as a single lease component. As the majority of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. We made an accounting policy election to keep leases with an initial term of 12 months or less off of our consolidated balance sheets. We recognize lease payments for such leases in our consolidated statements of operations on a straight-line basis over the lease term.
Upon adoption of this standard, we recognized a right-of-use asset of $
Supplemental balance sheet information related to operating leases was as follows (in millions):
| Financial Statement Line Item on our |
| December 31, |
| January 1, | |||
Operating Leases | Consolidated Balance Sheets | 2019 | 2019 | |||||
Right-of-use assets |
| $ | | $ | | |||
Current lease liabilities |
| $ | | $ | | |||
Non-current lease liabilities |
| |
| | ||||
$ | | $ | | |||||
In connection with completion of construction in the third quarter of 2019 of a building we own, we leased part of the space in the building to another entity as part of a broader collaboration. The lease is accounted for as a sales-type lease. In 2019, we reclassified $
F-23
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
3. Recently Issued Accounting Standards (Continued)
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 under the Tax Cuts and Jobs Act (Tax Reform) is recorded. We adopted the new standard on January 1, 2019. Adoption of this standard did not have a material impact on our financial statements.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, to eliminate or modify certain disclosure rules that are redundant, outdated, or duplicative of U.S. GAAP or other regulatory requirements. Among other changes, the amendments eliminated the annual requirement to disclose the high and low trading prices of our common stock. In addition, the amendments expanded the disclosure requirements related to the analysis of shareholders’ equity for interim financial statements. An analysis of the changes in each caption of shareholders’ equity presented in the balance sheet must be provided in a note or separate statement, and we provided this disclosure in a separate statement (Consolidated Statements of Stockholders’ Equity) beginning in the first quarter of 2019.
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 in 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, which occurs at the time Adcirca is shipped from a Lilly distribution center. 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 in Note 2—Summary of Significant Accounting Policies—Revenue Recognition.
Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which introduces new guidance for estimating credit losses on certain types of financial instruments based on expected losses and the timing of the recognition of such losses. ASU 2016-13 will be effective for interim and annual reporting periods beginning after December 15, 2019. We identified all of our financial instruments that could be impacted by the new standard as well as gathered data required to comply with the guidance. We updated our internal controls, business processes, and accounting policies related to both the implementation of, and ongoing compliance with, the new guidance. Although we are still finalizing our evaluation of the standard update and the quantification of its impact, we do not expect its adoption will have a material impact.
F-24
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
3. Recently Issued Accounting Standards (Continued)
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 August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13), which eliminates, adds and modifies certain disclosure requirements for fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. 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. ASU 2018-14 is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, Income Taxes and also improves consistent application by clarifying and amending existing guidance. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of this guidance on our financial statements.
F-25
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
4. Investments
Marketable Investments
Available-for-Sale Debt Securities
Available-for-sale debt securities are recorded at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive loss in stockholders’ equity, until realized. Available-for-sale debt securities consisted of the following (in millions):
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
As of December 31, 2019 |
| Cost |
| Gains |
| Losses |
| Value | ||||
U.S. government and agency securities | $ | | $ | | $ | ( | $ | | ||||
Corporate debt securities | | | — | | ||||||||
Total | $ | | $ | | $ | ( | $ | | ||||
Reported under the following captions on our consolidated balance sheets: | ||||||||||||
Current marketable investments | | |||||||||||
Non-current marketable investments | | |||||||||||
Total | $ | | ||||||||||
Gross | Gross | |||||||||||
| Amortized | Unrealized |
| Unrealized |
| Fair | ||||||
As of December 31, 2018 |
| Cost |
| Gains |
| Losses |
| Value | ||||
U.S. government and agency securities | $ | | $ | | $ | ( | $ | | ||||
Corporate debt securities | | — | ( | | ||||||||
Total | $ | | $ | | $ | ( | $ | | ||||
Reported under the following captions on our consolidated balance sheets: | ||||||||||||
Current marketable investments | | |||||||||||
Non-current marketable investments | | |||||||||||
Total |
|
|
|
| $ | | ||||||
The following table summarizes the contractual maturities of available-for-sale marketable investments (in millions):
As of December 31, 2019 | ||||||
Amortized | Fair | |||||
| Cost |
| Value | |||
Due within one year |
| $ | |
| $ | |
Due in one to three years |
| |
| | ||
Total | $ | | $ | | ||
F-26
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
4. Investments (Continued)
Held-to-Maturity Investments
Our current and long-term marketable investments included
Investments in Equity Securities with Readily Determinable Fair Values
We held investments in equity securities with readily determinable fair values of $
Investments in Privately-Held Companies
As of December 31, 2019, we maintained non-controlling equity investments in privately-held companies of $
During the years ended December 31, 2019, 2018 and 2017, we recorded
Consolidation of a Variable Interest Entity
In August 2019, we entered into an operating agreement and trust agreement related to the expected contribution of an asset to a newly created trust of which we are the beneficiary. The trust was created for legal and administrative purposes and is not expected to make future purchases. As the operator of the asset, we are required to incur all future expenses related to the operation and maintenance of the asset. Accordingly, the trust is deemed a VIE because it relies on our capital to sustain future operating expenses. We are deemed the primary beneficiary of the VIE because we are the sole provider of financial support and can unilaterally remove the trustee without cause. Accordingly, we consolidate the VIE’s balance sheet and results of operations.
As of December 31, 2019, our consolidated balance sheets included a $
F-27
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
4. Investments (Continued)
Deconsolidation of a Variable Interest Entity
In April 2017, we made a $
In June 2019, we elected to terminate the License Agreement. The termination of the License Agreement caused us to impair an associated IPR&D asset during the second quarter of 2019 and recognize an impairment charge of $
5. Fair Value Measurements
Assets and liabilities subject to fair value measurements are required to be disclosed within a fair value hierarchy. The fair value hierarchy ranks the quality and reliability of inputs used to determine fair value. Accordingly, assets and liabilities carried at, or permitted to be carried at, fair value are classified within the fair value hierarchy in one of the following categories based on the lowest level input that is significant in measuring fair value:
Level 1—Fair value is determined by using unadjusted quoted prices that are available in active markets for identical assets and liabilities.
Level 2—Fair value is determined by using inputs other than Level 1 quoted prices that are directly or indirectly observable. Inputs can include quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets and liabilities in inactive markets. Related inputs can also include those used in valuation or other pricing models such as interest rates and yield curves that can be corroborated by observable market data.
Level 3—Fair value is determined by using inputs that are unobservable and not corroborated by market data. Use of these inputs involves significant and subjective judgment.
We account for certain assets and liabilities at fair value and classify these assets and liabilities within the fair value hierarchy. Our other current assets and other current liabilities have fair values that approximate their carrying values.
F-28
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
5. Fair Value Measurements (Continued)
Assets and liabilities subject to fair value measurements are as follows (in millions):
As of December 31, 2019 | ||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Balance | |||||
Assets | ||||||||||||
Money market funds(1) | $ | | $ | — | $ | — | $ | | ||||
Time deposits(2) |
| — |
| |
| — |
| | ||||
U.S. government and agency securities(3) | — | | — | | ||||||||
Corporate debt securities(3) | — | | — | | ||||||||
Equity securities(4) | | — | — | | ||||||||
Total assets | $ | | $ | | $ | — | $ | | ||||
Liabilities | ||||||||||||
Contingent consideration(5) |
| — |
| — |
| |
| | ||||
Total liabilities | $ | — | $ | — | $ | | $ | | ||||
As of December 31, 2018 | ||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Balance | |||||
Assets |
| |||||||||||
Money market funds (1) | $ | | $ | — | $ | — | $ | | ||||
Time deposits(2) |
| — |
| |
| — |
| | ||||
U.S. government and agency securities(3) | — | | — | | ||||||||
Corporate debt securities(3) | — | | — | | ||||||||
Equity securities(4) | | — | — | | ||||||||
Total assets | $ | | $ | | $ | — | $ | | ||||
Liabilities | ||||||||||||
Contingent consideration (5) |
| — |
| — |
| |
| | ||||
Total liabilities | $ | — | $ | — | $ | | $ | | ||||
| (1) | Included in cash and cash equivalents on our consolidated balance sheets. |
| (2) | Included in cash and cash equivalents and current marketable investments on our 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 cash and cash equivalents and current and non-current marketable investments on our consolidated balance sheets. Refer to Note 4—Investments—Marketable Investments—Available-for-Sale Debt Securities for further information. The fair value of these securities is principally measured or corroborated by trade data for identical securities for which related trading activity is not sufficiently frequent to be considered a Level 1 input or comparable securities that are more actively traded. |
| (4) | Included in current marketable investments on our consolidated balance sheets. The fair value of these securities is based on quoted market prices for identical instruments in active markets. During the year ended December 31, 2019, we recognized $ |
F-29
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
5. Fair Value Measurements (Continued)
| (5) | Included in non-current liabilities on our 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. The change in the fair value of contingent consideration for the year ended December 31, 2019 was not material. |
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value because of their short maturities. The fair values of our marketable investments and contingent consideration are reported above within the fair value hierarchy. 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.
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following by major categories (in millions):
As of December 31, | ||||||
| 2019 |
| 2018 | |||
Accounts payable | $ | | $ | | ||
Accrued expenses: | ||||||
Sales related (royalties, rebates and fees) | | | ||||
Payroll related |
| |
| | ||
Other |
| |
| | ||
Total accrued expenses | $ | | $ | | ||
Total accounts payable and accrued expenses | $ | | $ | | ||
7. Debt
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: (1) an unsecured revolving credit facility of up to $
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). To date, we have elected to calculate interest on the outstanding balance at LIBOR plus an applicable margin.
F-30
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
7. Debt (Continued)
On June 27, 2018, we borrowed $
On January 24, 2019, we paid $
The 2018 Credit Agreement contains customary events of default and customary affirmative and negative covenants. As of December 31, 2019, we were in compliance with these covenants. Lung Biotechnology PBC is our only subsidiary that guarantees our obligations under the 2018 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 capitalized debt issuance costs, which are being amortized to interest expense over the contractual term of the 2018 Credit Agreement. As of December 31, 2019, $
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 $
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.
Convertible Note Hedge and Warrant Transactions
In October 2011, we issued $
In connection with the issuance of the Convertible Notes, we sold to Deutsche Bank AG London (DB London) warrants to acquire up to approximately
F-31
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
7. Debt (Continued)
Interest Expense
Details of interest expense presented on our consolidated statements of operations are as follows (in millions):
Year Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Credit Facility interest expense (1) | $ | | $ | | $ | | |||
Other interest expense | — | — | | ||||||
Total interest expense | $ | | $ | | $ | | |||
| (1) | Represents interest expense related to debt and amortization of issuance costs associated with our 2018 and 2016 Credit Agreements. |
8. Temporary Equity
Temporary equity included certain equity securities that: (1) had redemption features outside our control; (2) were not classified as an asset or liability; (3) were excluded from permanent stockholders’ equity; and (4) were not mandatorily redeemable. Amounts included in temporary equity related to securities that were redeemable at a fixed or determinable price.
Components comprising the carrying value of temporary equity include the following (in millions):
As of December 31, | ||||||
| 2019 |
| 2018 | |||
Common stock subject to repurchase(1) | $ | — | $ | | ||
Preferred stock with redemption rights(2) |
| — |
| | ||
Total | $ | — | $ | | ||
| (1) | Pursuant to a license agreement with Toray Industries Inc. (Toray), we issued |
| (2) | The preferred stock issued by the variable interest entity we previously consolidated includes rights that allow the holders to redeem the preferred stock at the original issuance price in exchange for cash. In the third quarter of 2019, we deconsolidated the entity’s balance sheet, which included $ |
F-32
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
9. Share-Based Compensation
As of December 31, 2019, we have
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 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):
Year Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Stock options |
| $ | |
| $ | |
| $ | |
Restricted stock units |
| |
| |
| | |||
STAP awards |
| ( |
| ( |
| | |||
Employee stock purchase plan |
| |
| |
| | |||
Total share-based compensation expense (benefit) before tax | $ | | $ | ( | $ | | |||
Share-based compensation capitalized as part of inventory | $ | | $ | | $ | | |||
As a result of the adoption of ASU 2016-09, we established an accounting policy election to account for forfeitures of share-based awards and STAPs when they occur. Upon adoption, we recognized a cumulative-effect adjustment for the removal of the forfeiture estimate with respect to awards that were continuing to vest as of January 1, 2017. The adjustment decreased retained earnings by $
F-33
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
9. Share-Based Compensation (Continued)
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.
In March 2017 and March 2018, we issued stock options with performance conditions to certain executives with vesting conditions tied to the achievement of specified performance criteria, which have target performance levels that span from to
A description of the key inputs, requiring estimates, used in determining the fair value of stock options are provided below:
Expected term—The expected term reflects the estimated time period we expect an award to remain outstanding. For the years ended December 31, 2019, 2018 and 2017, we used the simplified approach to develop this input for our stock options as we do not have sufficient historical data related to stock option exercises. Under the simplified approach, the expected term reflects the weighted average midpoint between the vesting date and the expiration date of the awards. For the expected term input related to our STAP awards, refer to the Share Tracking Awards Plans section below.
Expected volatility—Volatility is a measure of the amount the price of our common stock has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. We use historical volatility based on weekly price observations of our common stock during the period immediately preceding an award that is equal to its expected term up to a maximum period of
Risk-free interest rate—The risk-free interest rate is the average interest rate consistent with the yield available on a U.S. Treasury note with a term equal to the expected term of an award.
Expected dividend yield—We do not pay cash dividends on our common stock and do not expect to do so in the future. Therefore, the dividend yield is zero.
The following weighted average assumptions were used in estimating the fair value of stock options granted to employees during the twelve months ended December 31, 2019, December 31, 2018, and December 31, 2017:
| |||||||
Year Ended December 31, | |||||||
| 2019 |
| 2018 |
| 2017 |
| |
Expected term of awards (in years) | |||||||
Expected volatility | | % | | % | | % | |
Risk-free interest rate | | % | | % | | % | |
Expected dividend yield | | % | % | % | |||
F-34
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
9. Share-Based Compensation (Continued)
A summary of the activity and status of stock options under our equity incentive plans is presented below:
Weighted | ||||||||||
|
|
| Average |
| ||||||
Weighted | Remaining | Aggregate | ||||||||
Average | Contractual | Intrinsic | ||||||||
Exercise | Term | Value | ||||||||
| Options |
| Price |
| (in Years) |
| (in millions) | |||
Outstanding at January 1, 2019 |
| | $ | |
|
|
|
| ||
Granted |
| |
| |
|
|
| |||
Exercised |
| ( |
| |
|
|
|
| ||
Forfeited |
| ( |
| |
|
|
|
| ||
Outstanding at December 31, 2019 |
| | $ | |
| $ | | |||
Exercisable at December 31, 2019 |
| | $ | |
| $ | | |||
Unvested at December 31, 2019 |
| | $ | |
| $ | | |||
The weighted average fair value of a stock option granted during each of the years in the three-year period ended December 31, 2019, was $
Total share-based compensation expense related to stock options is recorded as follows (in millions):
Year Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Cost of product sales | $ | |
| $ | |
| $ | | |
Research and development |
| |
|
| |
| | ||
Selling, general and administrative |
| |
|
| |
| | ||
Share-based compensation expense before tax |
| |
|
| |
| | ||
Related income tax benefit |
| ( |
|
| ( |
| ( | ||
Share-based compensation expense, net of tax | $ | |
| $ | |
| $ | | |
As of December 31, 2019, unrecognized compensation cost relating to stock options was $
Stock option exercise data is summarized below (dollars in millions):
Year Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Number of options exercised |
| |
| |
| | |||
Cash received from options exercised | $ | | $ | | $ | | |||
Total intrinsic value of options exercised | $ | | $ | | $ | | |||
Tax benefits realized from options exercised(1) | $ | | $ | | $ | | |||
| (1) | We recognize these tax benefits on our consolidated statements of operations within income tax benefit (expense). |
F-35
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
9. Share-Based Compensation (Continued)
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
A summary of the activity with respect to, and status of, restricted stock units during year ended December 31, 2019 is presented below:
|
|
| Weighted |
| ||||||
|
|
| Average |
| ||||||
| Weighted |
| Remaining |
| Aggregate | |||||
Number of |
| Average |
| Contractual | Intrinsic | |||||
Restricted | Grant | Term | Value | |||||||
Stock Units | Price |
| (in Years) | (in millions) | ||||||
Unvested at January 1, 2019 |
| | $ | |
|
| ||||
Granted |
| |
| |
|
| ||||
Vested |
| ( |
| |
|
| ||||
Forfeited/canceled |
| ( |
| |
|
| ||||
Unvested at December 31, 2019 |
| | $ | |
| $ | | |||
Total share-based compensation expense relating to restricted stock units is recorded as follows (in millions):
| Year Ended December 31, | ||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Cost of product sales |
| $ | |
| $ | |
| $ | — |
Research and development |
| |
| |
| — | |||
Selling, general and administrative |
| |
| |
| | |||
Share-based compensation expense before tax |
| |
| |
| | |||
Related income tax benefit |
| ( |
| ( |
| ( | |||
Share-based compensation expense, net of tax | $ | | $ | | $ | | |||
As of December 31, 2019, unrecognized compensation cost related to the grant of restricted stock units was $
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
The aggregate STAP liability balance was $
F-36
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
9. Share-Based Compensation (Continued)
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. Refer to the descriptions of these key inputs, requiring estimates, used in determining the fair value of the awards in the Stock Options section above. A description of the expected term input for STAP awards is provided below:
Expected term—The expected term reflects the estimated time period we expect an award to remain outstanding. For the year ended December 31, 2017 and for the nine months ended September 30, 2018, we used historical data to develop this input for our STAP awards. As of December 31, 2018, we no longer believed historical exercise data was a reasonable approach to determine the expected exercise behavior of outstanding STAPs given the prolonged volatility of the price of our common stock. As such, we began determining the expected term assumption as of December 31, 2018 using the weighted average midpoint of the remaining contractual term for outstanding awards and expect to continue to use this methodology until circumstances dictate otherwise. The midpoint method resulted in a remaining weighted average expected term of
The table below includes the weighted-average assumptions used to measure the fair value of the outstanding STAP awards:
As of December 31, |
| ||||||
| 2019 |
| 2018 |
| 2017 |
| |
Expected term of awards (in years) | |||||||
Expected volatility | | % | | % | | % | |
Risk-free interest rate | | % | | % | | % | |
Expected dividend yield | | % | % | % | |||
The closing price of our common stock was $
F-37
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
9. Share-Based Compensation (Continued)
A summary of the activity and status of STAP awards during the year ended December 31, 2019 is presented below:
Weighted | ||||||||||
Average | ||||||||||
Weighted- | Remaining | Aggregate | ||||||||
Average | Contractual | Intrinsic | ||||||||
Number of | Exercise | Term | Value | |||||||
| Awards |
| Price |
| (Years) |
| (in millions) | |||
Outstanding at January 1, 2019 |
| | $ | |
|
|
|
| ||
Granted |
| — |
| — |
|
|
|
| ||
Exercised |
| ( |
| |
|
|
|
| ||
Forfeited |
| ( |
| |
|
|
|
| ||
Outstanding at December 31, 2019 |
| | $ | |
| $ | | |||
Exercisable at December 31, 2019 |
| | $ | |
| $ | | |||
Unvested at December 31, 2019 |
| | $ | |
| $ | | |||
Share-based compensation (benefit) expense recognized in connection with STAP awards is as follows (in millions):
Year Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Cost of product sales | $ | ( | $ | ( | $ | | |||
Research and development |
| ( |
| ( |
| | |||
Selling, general and administrative |
| ( |
| ( |
| | |||
Share-based compensation (benefit) expense before tax |
| ( |
| ( |
| | |||
Related income tax expense (benefit) |
| |
| |
| ( | |||
Share-based compensation (benefit) expense, net of tax | $ | ( | $ | ( | $ | | |||
Cash paid to settle STAP exercises during the years ended December 31, 2019, 2018 and 2017 was $
Employee Stock Purchase Plan
In June 2012, our shareholders approved the 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
F-38
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
10. Stockholders’ Equity
Earnings Per Common Share
Basic (loss) earnings per common share is computed by dividing net (loss) 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 our outstanding stock options, restricted stock units and shares issuable under the ESPP, as if they were vested and exercised.
For the year ended December 31, 2019, we had a net loss, and as such, all outstanding stock options, restricted stock units and shares issuable under the ESPP were excluded from our calculation of diluted loss per share. The components of basic and diluted (loss) earnings per common share comprised the following (in millions, except per share amounts):
Year Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Numerator: | |||||||||
Net (loss) income | $ | ( | $ | | $ | | |||
Denominator: | |||||||||
Weighted average outstanding shares—basic |
| |
| |
| | |||
Effect of dilutive securities(1): | |||||||||
Warrants |
| — |
| — |
| | |||
Stock options, restricted stock units and employee stock purchase plan |
| — |
| |
| | |||
Weighted average shares—diluted(2) |
| |
| |
| | |||
Net (loss) income per common share: | |||||||||
Basic | $ | ( | $ | | $ | | |||
Diluted | $ | ( | $ | | $ | | |||
Stock options, restricted stock units, shares issuable under the ESPP and warrants excluded from calculation(2) |
| |
| |
| | |||
| (1) | Calculated using the treasury stock method. |
| (2) | Certain stock options, restricted stock units, shares issuable under the ESPP and warrants have been excluded from the computation of diluted (loss) earnings per share because their impact would be anti-dilutive. |
Share Repurchases
In April 2017, our Board of Directors approved a share repurchase program authorizing up to $
F-39
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
10. Stockholders’ Equity (Continued)
Shareholder Rights Plan
In June 2008, we entered into an Amended and Restated Rights Agreement with The Bank of New York as Rights Agent (the Plan), which amended and restated our original Rights Agreement dated December 17, 2000. The Plan, as amended and restated, extended the expiration date of the Preferred Share Purchase Rights (Rights) from December 29, 2010 to June 26, 2018, and increased the purchase price of each Right from $
Accumulated Other Comprehensive Loss
The following table includes changes in accumulated other comprehensive loss by component, net of tax (in millions):
Unrealized | ||||||||||||
Gains and | ||||||||||||
Defined | Foreign | (Losses) on | ||||||||||
Benefit | Currency | Available-for- | ||||||||||
Pension | Translation | Sale | ||||||||||
| Plan(1) |
| Losses |
| Securities |
| Total | |||||
Balance, January 1, 2019 | $ | | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive (loss) income before reclassifications |
| ( |
| — | |
| ( | |||||
Amounts reclassified from accumulated other comprehensive loss |
| ( |
| — | — |
| ( | |||||
Net current-period other comprehensive (loss) income |
| ( |
| — | |
| ( | |||||
Balance, December 31, 2019 | $ | — | $ | ( | $ | | $ | ( | ||||
Unrealized | ||||||||||||
Gains and | ||||||||||||
Defined | Foreign | (Losses) on | ||||||||||
Benefit | Currency | Available-for- | ||||||||||
Pension | Translation | Sale | ||||||||||
| Plan(1) |
| Losses |
| Securities |
| Total | |||||
Balance, January 1, 2018 | $ | | $ | ( | $ | ( | $ | ( | ||||
Other comprehensive income (loss) before reclassifications |
| |
| — | ( |
| | |||||
Amounts reclassified from accumulated other comprehensive loss |
| |
| — | — |
| | |||||
Net current-period other comprehensive income (loss) |
| |
| — | ( |
| | |||||
Balance, December 31, 2018 | $ | | $ | ( | $ | ( | $ | ( | ||||
| (1) | Refer to Note 12—Employee Benefit Plans—Supplemental Executive Retirement Plan, which identifies the captions within our consolidated statements of operations where reclassification adjustments were recognized and their associated tax impact. |
F-40
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
11. Income Taxes
Components of income tax (benefit) expense consist of the following (in millions):
Year Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Current: | |||||||||
Federal | $ | | $ | | $ | | |||
State |
| |
| |
| | |||
Total current |
| |
| |
| | |||
Deferred | |||||||||
Federal |
| ( |
| |
| | |||
State |
| ( |
| |
| ( | |||
Total deferred |
| ( |
| |
| | |||
Total income tax (benefit) expense | $ | ( | $ | | $ | | |||
Presented below is a reconciliation of income tax (benefit) expense computed at the statutory federal tax rate of
Year Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Federal taxes at the statutory rate | $ | ( | $ | | $ | | |||
General business credits |
| ( |
| ( |
| ( | |||
Nondeductible compensation expense | | | | ||||||
Change in valuation allowance |
| ( |
| |
| | |||
Foreign income adjustment | | — | — | ||||||
State taxes, net of federal benefit | ( | | | ||||||
Deduction for foreign-derived intangible income | ( | ( | — | ||||||
Deconsolidation of VIE | ( | — | — | ||||||
Other | ( | | | ||||||
Excess tax benefits from share-based compensation |
| ( |
| ( |
| ( | |||
Tax reform | — | ( | | ||||||
Section 199 deduction | — | — | ( | ||||||
Nondeductible portion of DOJ Settlement | — | — | | ||||||
Total income tax (benefit) expense | $ | ( | $ | | $ | ||||
F-41
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
11. Income Taxes (Continued)
Components of the net deferred tax assets are as follows (in millions):
As of December 31, | ||||||
| 2019 |
| 2018 | |||
Deferred tax assets: | ||||||
Intangible assets | $ | | $ | | ||
Share-based compensation |
| |
| | ||
Impairments |
| |
| | ||
SERP | | | ||||
NOLs | | | ||||
Reserves |
| |
| | ||
Other |
| |
| | ||
Total deferred tax assets | | | ||||
Deferred tax liabilities: |
|
| ||||
Plant and equipment principally due to differences in depreciation |
| ( |
| ( | ||
Basis differences in foreign entities |
| |
| ( | ||
Other |
| ( |
| ( | ||
Net deferred tax assets before valuation allowance | | | ||||
Valuation allowance | ( | ( | ||||
Net deferred tax assets | $ | | $ | |||
As of December 31, 2019, there were
The Global Intangible Low Tax Income (GILTI) provision of Tax Reform requires us to include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. We have elected to account for the GILTI tax in the period in which it is incurred, and do not expect any significant impacts from this tax.
We are subject to federal and state taxation in the United States and various foreign jurisdictions. We are no longer subject to income tax examinations by the Internal Revenue Service and all other major jurisdictions for tax years prior to 2011. At December 31, 2019, we have gross federal, foreign and state net operating loss carryforwards of $
F-42
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
12. Employee Benefit Plans
Supplemental Executive Retirement Plan
We maintain the United Therapeutics Corporation Supplemental Executive Retirement Plan (SERP) to provide retirement benefits to certain senior members of our management team.
Participants who retire at age
Because we do not fund the SERP, we recognize a liability equal to the projected benefit obligation as measured at the end of each fiscal year.
A reconciliation of the beginning and ending balances of the projected benefit obligation is presented below (in millions):
Year Ended December 31, | ||||||
| 2019 |
| 2018 | |||
Projected benefit obligation at the beginning of the year | $ | | $ | | ||
Service cost |
| |
| | ||
Interest cost |
| |
| | ||
Benefits paid | ( | ( | ||||
Net actuarial loss (gain)(1) |
| |
| ( | ||
Projected benefit obligation at the end of the year | $ | | $ | | ||
Amount included in Other current liabilities(2) | $ | | $ | | ||
Amount included in Other non-current liabilities | $ | | $ | | ||
| (1) | During the fourth quarter of 2018, a participant in the SERP departed before retirement age under the terms of the SERP. As a result, we recorded a $ |
| (2) | This amount represents the benefit obligation due to participants who are eligible to retire and whose benefit payments could commence within |
The following weighted average assumptions were used to measure the SERP obligation:
Year Ended December 31, |
| ||||
| 2019 |
| 2018 |
| |
Discount rate | | % | | % | |
Salary increases |
| | % | | % |
Lump-sum distribution rate | | % | | % | |
F-43
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
12. Employee Benefit Plans (Continued)
The components of net periodic pension cost recognized on our consolidated statements of operations consisted of the following (in millions):
Year Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Service cost | $ | | $ | | $ | | |||
Interest cost |
| |
| |
| | |||
Amortization of prior service cost |
| |
| |
| | |||
Amortization of net actuarial gain |
| ( |
| ( |
| ( | |||
Settlement | ( | — | — | ||||||
Total | $ | | $ | | $ | | |||
For the years ended December 31, 2019 and December 31, 2018, the service cost component is reported within Operating expenses and the other components are reported in other income (expense), net on our consolidated statements of operations. For the year ended December 31, 2017, all components of net periodic pension cost are reported within Operating expenses on our consolidated statements of operations. We did not reclassify amounts for the year ended December 31, 2017 to conform with current year presentation as these amounts were not material to our financial statements.
Amounts related to the SERP that have been recognized in other comprehensive (loss) income are as follows (in millions):
Year Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Net actuarial (loss) gain | $ | ( | $ | | $ | ( | |||
Prior service cost |
| |
| |
| | |||
Settlement | ( | — | — | ||||||
Total recognized in other comprehensive (loss) income |
| ( |
| |
| ( | |||
Tax benefit (expense) |
| |
| ( |
| | |||
Total, net of tax | $ | ( | $ | | $ | ( | |||
The table below presents amounts related to the SERP included in accumulated other comprehensive loss that have not yet been recognized as a component of net periodic pension cost on our consolidated statements of operations (in millions):
Year Ended December 31, | |||||||||
| 2019 |
| 2018 |
| 2017 | ||||
Net actuarial gain | $ | ( | $ | ( | $ | ( | |||
Prior service cost |
| |
| |
| | |||
Total included in accumulated other comprehensive loss |
| ( |
| ( |
| ( | |||
Tax expense |
| |
| |
| | |||
Total, net of tax | $ | — | $ | ( | $ | ( | |||
F-44
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
12. Employee Benefit Plans (Continued)
We estimate $
The accumulated benefit obligation, a measure that does not consider future increases in participants’ salaries, was $
Future estimated benefit payments, based on current assumptions, including election of lump-sum distributions and expected future service, are as follows (in millions):
Year Ended December 31, |
| ||
2020 | $ | | |
2021 |
| — | |
2022 |
| — | |
2023 |
| | |
2024 |
| | |
Thereafter |
| | |
Total | $ | |
Employee Retirement Plan
We maintain a Section 401(k) Salary Reduction Plan which is open to all eligible full-time employees. Under the 401(k) Plan, eligible employees can make pre-tax or after-tax contributions up to statutory limits. Currently, we make discretionary matching contributions to the 401(k) Plan equal to
13. Commitments and Contingencies
Operating Leases
We lease facilities and equipment under operating lease arrangements that have terms expiring at various dates through 2028. Certain lease arrangements include renewal options and escalation clauses. In addition, various lease agreements to which we are party require that we comply with certain customary covenants throughout the term of these leases. If we are unable to comply with these covenants and cannot reach a satisfactory resolution in the event of noncompliance, these agreements could terminate.
F-45
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
13. Commitments and Contingencies (Continued)
Future minimum lease payments under non-cancelable operating leases as of December 31, 2019, are as follows (in millions):
Year Ending December 31, |
| ||
2020 | $ | | |
2021 |
| | |
2022 |
| | |
2023 |
| | |
2024 |
| | |
Thereafter |
| | |
Total | $ | |
Total rent expense was $
F-46
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
13. Commitments and Contingencies (Continued)
Milestone Payments and Royalty Obligations
We are party to certain license agreements pursuant to which we have in-licensed or acquired intellectual property rights covering our commercial and/or development-stage products. Generally, these agreements require that we make milestone payments in cash upon the achievement of certain product development and commercialization goals and payments of royalties upon commercial sales. The following table outlines our financial obligations under certain of these agreements:
Counterparty |
| Relevant Product |
| Our Financial Obligation |
|---|---|---|---|---|
Supernus Pharmaceuticals, Inc. | Orenitram | royalty on net product sales of Orenitram, through the second quarter of 2026 | ||
Lilly | Adcirca | |||
The Scripps Research Institute | Unituxin | |||
Medtronic, Inc. | Implantable System for Remodulin | |||
DEKA Research & Development Corp. | Remunity | Product fees and royalties on net product sales of the Remunity system and on net sales of Remodulin for use with the system; reimbursement of DEKA’s development and manufacturing costs | ||
Samumed LLC | LNG01 (formerly SM04646) | Low double-digit royalties on LNG01 net product sales and up to $ | ||
F-47
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
13. Commitments and Contingencies (Continued)
Counterparty |
| Relevant Product |
| Our Financial Obligation |
|---|---|---|---|---|
MannKind Corporation | Treprostinil Technosphere | Low double-digit royalties on net product sales of Treprostinil Technosphere and up to $ | ||
Arena | Ralinepag | Low double-digit, tiered royalties on net product sales of ralinepag (any route of administration); a one-time payment of $ |
14. Segment Information
We currently operate as
Net product sales, cost of product sales and gross profit for each of our commercial products were as follows (in millions):
| Remodulin |
| Tyvaso |
| Orenitram |
| Unituxin |
| Adcirca |
| Total | |||||||
Year Ended December 31, 2019 | ||||||||||||||||||
Net product sales | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Cost of product sales |
| |
| |
| |
| |
| |
| | ||||||
Gross profit | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Year Ended December 31, 2018 | ||||||||||||||||||
Net product sales | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Cost of product sales |
| |
| |
| |
| |
| |
| | ||||||
Gross profit | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Year Ended December 31, 2017 | ||||||||||||||||||
Net product sales | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
Cost of product sales |
| |
| |
| |
| |
| |
| | ||||||
Gross profit | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
F-48
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
14. Segment Information (Continued)
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):
Year Ended December 31, |
| 2019 |
| 2018 |
| 2017 | |||
United States | $ | | $ | | $ | | |||
Rest-of-World(1) |
| |
| |
| | |||
Total | $ | | $ | | $ | | |||
| (1) | Primarily Europe. |
We recorded revenue from
Year Ended December 31, |
| 2019 |
| 2018 |
| 2017 |
|
Distributor 1 |
| | % | | % | | % |
Distributor 2 |
| | % | | % | | % |
Long-lived assets (property, plant and equipment) located by geographic area are as follows (in millions):
Year Ended December 31, |
| 2019 |
| 2018 | 2017 | ||||
United States | $ | | $ | | $ | | |||
Rest-of-World |
| |
| |
| | |||
Total | $ | | $ | | $ | | |||
15. Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for each of the years ended December 31, 2019 and 2018 are as follows (in millions, except per share amounts):
Quarter Ended | ||||||||||||
December 31, | September 30, | June 30, | March 31, | |||||||||
| 2019 |
| 2019 |
| 2019 |
| 2019 | |||||
Total revenues | $ | | $ | | $ | | $ | | ||||
Cost of product sales | | | | | ||||||||
Gross profit |
| |
| |
| |
| | ||||
Net income (loss)(1) |
| |
| |
| |
| ( | ||||
Net income (loss) per share—basic | $ | | $ | | $ | | $ | ( | ||||
Net income (loss) per share—diluted | $ | | $ | | $ | | $ | ( | ||||
F-49
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
15. Quarterly Financial Information (Unaudited) (Continued)
Quarter Ended | ||||||||||||
December 31, | September 30, | June 30, | March 31, | |||||||||
| 2018 |
| 2018 |
| 2018 |
| 2018 | |||||
Total revenues | $ | | $ | | $ | | $ | | ||||
Cost of product sales | | | | | ||||||||
Gross profit |
| |
| |
| |
| | ||||
Net income (2) |
| |
| |
| |
| | ||||
Net income per share—basic | $ | | $ | | $ | | $ | | ||||
Net income per share—diluted | $ | | $ | | $ | | $ | | ||||
| (1) | Operating results for the quarters ended December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019 included $ |
| (2) | Operating results for the quarters ended December 31, 2018, September 30, 2018, June 30, 2018 and March 31, 2018 included $( |
16. Litigation
Department of Justice Subpoena
In May 2016, we received a subpoena from the U.S. Department of Justice (DOJ) requesting documents regarding our support of 501(c)(3) organizations that provide financial assistance to patients. Other companies received similar inquiries as part of a DOJ investigation regarding whether that support may violate the Federal Anti-Kickback Statute and the Federal False Claims Act. On December 19, 2017, we entered into a civil Settlement Agreement with the DOJ and the Office of Inspector General (OIG) of the Department of Health and Human Services (collectively the “United States Government”). The Settlement Agreement is neither an admission of facts nor liability, nor a concession by the United States Government that its contentions are not well-founded. Under the Settlement Agreement, we paid to the United States Government the sum of approximately $
F-50
UNITED THERAPEUTICS CORPORATION
Notes to Consolidated Financial Statements (Continued)
16. Litigation (Continued)
Sandoz and RareGen, LLC
On April 16, 2019, Sandoz Inc. (Sandoz) and its commercialization collaborator, RareGen, LLC, filed a complaint in the U.S. District Court for the District of New Jersey against us and Smiths Medical ASD, Inc. (Smiths Medical), alleging that we and Smiths Medical engaged in anticompetitive conduct in connection with plaintiffs’ efforts to launch their generic version of Remodulin. In particular, the complaint alleges that we and Smiths Medical unlawfully impeded competition by entering into an agreement to produce CADD-MS®3 cartridges specifically for the delivery of subcutaneous Remodulin, without making these cartridges available for the delivery of Sandoz’s generic version of Remodulin. The parties completed expedited discovery in anticipation of a motion filed by the plaintiffs on October 4, 2019, seeking preliminary injunctive relief. We and Smiths Medical filed a motion to dismiss the complaint, and we filed our opposition to plaintiffs’ motion for a preliminary injunction on October 25, 2019. On December 10, 2019, the court held a hearing on the plaintiffs’ motion for a preliminary injunction. On January 29, 2020, the Court issued a decision denying the request for preliminary injunction sought by Sandoz and RareGen. According to the Court, “[Sandoz and RareGen] have not met their burden of demonstrating a reasonable probability of eventual success in the litigation.” The Court also denied our and Smiths Medical’s motion to dismiss the entire action. We believe plaintiffs’ claims to be meritless and intend to vigorously defend the litigation. However, due to the uncertainty inherent in any litigation, we cannot guarantee that an adverse outcome will not result. Any litigation of this nature could involve substantial cost, and an adverse outcome could result in substantial monetary damages and/or injunctive relief adverse to our business. We currently are not able to reasonably estimate a range of potential losses due to the early stage of the litigation.
17. Arena License Agreement
On November 15, 2018, we entered into an exclusive license agreement with Arena related to ralinepag, a next-generation, oral, selective and potent prostacyclin receptor agonist being developed for the treatment of PAH. On January 24, 2019, in connection with the closing of the transactions contemplated by the license agreement: (1) Arena granted to us perpetual, irrevocable and exclusive rights throughout the universe to develop, manufacture and commercialize ralinepag; (2) Arena transferred to us certain other assets related to ralinepag, including, among others, related domain names and trademarks, permits, certain contracts, inventory, regulatory documentation, Investigational New Drug (IND) Application No. 109021 (related to ralinepag) and non-clinical, pre-clinical and clinical trial data; (3) we assumed certain limited liabilities from Arena, including, among others, all obligations arising after the closing under the assumed contracts and the IND described above; and (4) we paid Arena an upfront payment of $
F-51
United Therapeutics Corporation
Schedule II—Valuation and Qualifying Accounts
Years Ended December 31, 2019, 2018 and 2017
(In millions)
Valuation Allowance on Deferred Tax Assets | |||||||||||||||
Balance at | Additions | ||||||||||||||
Beginning | Charged to | Other | Balance at | ||||||||||||
| of Year |
| Expense |
| Additions |
| Deductions |
| End of Year | ||||||
Year Ended December 31, 2019 (1) | $ | | $ | | $ | | $ | ( | $ | | |||||
Year Ended December 31, 2018 (2) | $ | | $ | | $ | | $ | ( | $ | | |||||
Year Ended December 31, 2017 (3) | $ | | $ | | $ | | $ | ( | $ | | |||||
| (1) | Other Additions consists of changes related to our investment in a foreign entity. |
| (2) | Other Additions consists of valuation allowances related to the acquisition of SteadyMed, SteadyMed dual consolidated loss limitation, and changes in deferred taxes related to our investment in a variable interest entity that were not charged to expense. |
| (3) | Other Additions consists of valuation allowances related to our investment in a variable interest entity. |
Inventory Reserves | ||||||||||||
Balance at | Additions | |||||||||||
Beginning | Charged to | Balance at | ||||||||||
| of Year |
| Expense |
| Deductions |
| End of Year | |||||
Year Ended December 31, 2019 | $ | | $ | | $ | ( | $ | | ||||
Year Ended December 31, 2018 | $ | | $ | | $ | ( | $ | | ||||
Year Ended December 31, 2017 | $ | | $ | | $ | ( | $ | | ||||
F-52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with participation of our Chairman and Chief Executive Officer and Chief Financial Officer and Treasurer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of December 31, 2019. Based on that evaluation, our Chairman and Chief Executive Officer and Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures were effective as of December 31, 2019.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting was designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal controls over financial reporting, no matter how well designed, have inherent limitations. As a result of these inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those internal controls determined to be effective can provide only reasonable assurance with respect to the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Based on this assessment, our management concluded that, as of December 31, 2019, our internal control over financial reporting was effective.
Ernst & Young LLP, an independent registered public accounting firm, has issued an attestation report on our internal control over financial reporting. The report of Ernst & Young LLP is contained in Item 8 of this Report.
Attestation of Independent Registered Public Accounting Firm
The attestation report of our independent registered public accounting firm regarding internal control over financial reporting is set forth in Item 8 of this Report under the caption “Report of Independent Registered Public Accounting Firm” and incorporated herein by reference.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
82
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information as to the individuals serving on our board of directors is set forth below under the heading Board of Directors. Additional information required by Item 10 regarding nominees and directors appearing under Proposal No. 1: Election of Directors in our definitive proxy statement for our 2020 annual meeting of shareholders currently scheduled for June 26, 2020 (the 2020 Proxy Statement) is hereby incorporated herein by reference. Information regarding our executive officers appears in Item 1 of this Report under the heading Information about our Executive Officers. Information regarding the Audit Committee and the Audit Committee’s financial expert appearing under the heading Committees of our Board of Directors—Audit Committee in our 2020 Proxy Statement is hereby incorporated herein by reference.
Information appearing under the heading Delinquent Section 16(a) Reports in our 2020 Proxy Statement is hereby incorporated herein by reference.
We have a written Code of Conduct and Business Ethics that applies to our principal executive officer, principal financial officer and our principal accounting officer and every other director, officer and employee of United Therapeutics. The Code of Conduct and Business Ethics is available on our Internet website at http://ir.unither.com/corporate-governance. A copy of the Code of Conduct and Business Ethics will be provided free of charge by making a written request and mailing it to our corporate headquarters offices to the attention of the Investor Relations Department. If any amendment to, or a waiver from, a provision of the Code of Conduct and Business Ethics that applies to the principal executive officer, principal financial officer and principal accounting officer is made, we intend to post such information on our Internet website within four business days at www.unither.com.
Board of Directors
Christopher Causey, M.B.A.
Principal, Causey Consortium
Raymond Dwek, C.B.E., F.R.S.
Director of the Glycobiology Institute and Professor Emeritus, University of Oxford
Richard Giltner
Former portfolio manager at Lyxor Asset Management, an asset management group at Société Générale, S.A.
Katherine Klein, Ph.D.
Vice-Dean and Professor, The Wharton School of the University of Pennsylvania
Ray Kurzweil
Director of Engineering, Google Inc.
83
Nilda Mesa, J.D.
Adjunct Professor and Director of the Urban Sustainability and Equity Planning Program, Columbia University
Judy D. Olian, Ph.D.
President, Quinnipiac University
Christopher Patusky, J.D., M.G.A.
Founding Principal, Patusky Associates, LLC
Martine Rothblatt, Ph.D., J.D., M.B.A.
Chairman and Chief Executive Officer of United Therapeutics
Louis Sullivan, M.D.
Former Secretary, U.S. Department of Health and Human Services
Tommy Thompson, J.D.
Former Secretary, U.S. Department of Health and Human Services
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation required by Item 11 will appear under the headings Director Compensation, Compensation Discussion and Analysis, and Executive Compensation Data in our 2020 Proxy Statement and is incorporated herein by reference.
Information concerning the Compensation Committee required by Item 11 will appear under the heading Compensation Committee Report in our 2020 Proxy Statement and is incorporated herein by reference.
84
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information regarding beneficial ownership of our common stock required by Item 12 will appear under Beneficial Ownership of Common Stock in our 2020 Proxy Statement and is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table presents information as of December 31, 2019, regarding our securities authorized for issuance under equity compensation plans:
Number of securities remaining | |||||||
Number of securities to be | available for future issuance | ||||||
issued upon exercise of | under equity compensation | ||||||
outstanding options and | Weighted average exercise | plans (excluding securities | |||||
restricted stock units | price of outstanding options | reflected in column (a)) | |||||
Plan category |
| (a)(3) |
| (b)(4) |
| (c)(5) | |
Equity compensation plan approved by security holders(1) | 8,395,984 | $ | 123.34 | 5,082,406 | |||
Equity compensation plan not approved by security holders(2) | 3,421 | — | 91,679 | ||||
Total |
| 8,399,405 | $ | 123.34 |
| 5,174,085 | |
| (1) | All outstanding stock options were issued under our two equity incentive plans approved by security holders in 1999 (the 1999 Plan) and 2015 (the 2015 Plan). The majority of outstanding restricted stock units (RSUs) were issued under the 2015 Plan. In addition, our employees have outstanding rights to purchase our common stock at a discount as part of our Employee Stock Purchase Plan (ESPP). No further awards will be issued under the 1999 Plan. Information regarding these plans is contained in Note 9—Share-Based Compensation to our consolidated financial statements. |
| (2) | We have one equity incentive plan, the United Therapeutics Corporation 2019 Inducement Stock Incentive Plan (the 2019 Inducement Plan), that has not been approved by our shareholders, as permitted by the Nasdaq Stock Market rules. The 2019 Inducement Plan was approved by our Board of Directors in February 2019 and provides for the issuance of up to 99,000 shares in the aggregate of our common stock under awards granted to newly-hired employees. Currently, we grant only restricted stock units to newly-hired employees under the 2019 Inducement Plan. Information regarding these plans is contained in Note 9—Share-Based Compensation to our consolidated financial statements. |
| (3) | Column (a) includes 8,088,680 shares of our common stock issuable upon the exercise of outstanding stock options issued under the 1999 and 2015 Plan; 307,304 shares issuable upon the vesting of outstanding RSUs issued under the 2015 Plan; and 3,421 shares issuable upon the vesting of outstanding RSUs issued under the 2019 Inducement Plan. The 2015 Plan and 2019 Inducement Plan use a share counting formula for determining the number of shares available for issuance under the plans. In accordance with this formula, each option issued under the 2015 Plan counts as one share, while each RSU issued under the 2015 Plan and the 2019 Inducement Plan counts as 2.14 shares. The number under column (a) represents the actual number of shares issuable under our outstanding awards without giving effect to the share counting formula. |
| (4) | Column (b) represents the weighted average exercise price of the outstanding stock options only. The outstanding RSUs are not included in this calculation because they do not have an exercise price. |
85
| (5) | Column (c) includes 91,679, 2,386,955, and 2,695,451 of shares available for future issuance under the 2019 Inducement Plan, the 2015 Plan and the ESPP, respectively. Under the ESPP, employees may purchase shares based upon a 6-month offering period at an amount equal to the lesser of (1) 85 percent of the closing market price of the Common Stock on the first day of the offering period, or (2) 85 percent of the closing market price of the Common Stock on the last day of the offering period. Refer to Note 9—Share-Based Compensation—Employee Stock Purchase Plan for more information. The number under column (c) assumes that all 310,725 outstanding RSUs included in column (a) vest. Each RSU is only counted as one share in column (a) since only one share is issuable upon vesting. However, if any RSU does not vest, the number of shares available for future issuance will increase by 2.14 because of the share counting formula described in note (3) above. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information concerning related party transactions and director independence required by Item 13 will appear under the headings Other Matters—Certain Relationships and Related Party Transactions, Our Corporate Governance—Board of Directors and Nominees—Director Independence, and Our Corporate Governance—Board Structure—Committees of Our Board of Directors in our 2020 Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by Item 14 concerning the principal accounting fees paid by the Registrant and the Audit Committee’s pre-approval policies and procedures, will appear under the heading Audit Matters in our 2020 Proxy Statement and is incorporated herein by reference.
86
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
In reviewing the agreements included or incorporated by reference as exhibits to this Report, it is important to note that they are included to provide investors with information regarding their terms, and are not intended to provide any other factual or disclosure information about United Therapeutics or the other parties to the agreements. The agreements contain representations and warranties made by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement, and: (1) should not be treated as categorical statements of fact, but rather as a way of allocating risk between the parties; (2) have in some cases been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; (3) may apply standards of materiality in a way that is different from what may be material to investors; and (4) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about United Therapeutics may be found elsewhere in this Report and our other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
(a)(1) | Our financial statements filed as part of this report on Form 10-K are set forth in the Index to Consolidated Financial Statements under Part II, Item 8 of this Form 10-K. |
(a)(2) | The Schedule II—Valuation and Qualifying Accounts is filed as part of this Form 10-K. All other schedules are omitted because they are not applicable or not required, or because the required information is included in our consolidated statements or notes thereto. |
(a)(3) | Exhibits filed as a part of this Form 10-K are listed on the Exhibit Index, which is incorporated by reference herein. |
Certain exhibits to this report have been included only with the copies of this report filed with the Securities and Exchange Commission. Copies of individual exhibits will be furnished to shareholders upon written request to United Therapeutics and payment of a reasonable fee (covering the expense of furnishing copies). Shareholders may request exhibit copies by contacting: United Therapeutics Corporation, Attn: Investor Relations, 1040 Spring Street, Silver Spring, Maryland 20910.
87
EXHIBIT INDEX
Exhibit No. |
| Description |
|---|---|---|
2.1 | ||
2.2 | * | |
3.1 | ||
3.2 | ||
3.3 | ||
3.4 | ||
4.1 | Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4. | |
4.2 | *** | Description of Securities Registered under Section 12 of the Exchange Act. |
10.1 | ||
10.2 | ** | |
10.3 | ** | |
10.4 | ** | |
10.5 | ** |
88
Exhibit No. |
| Description |
|---|---|---|
10.6 | ** | |
10.7 | ** | |
10.8 | ** | |
10.9 | ** | |
10.10 | ** | |
10.11 | ** | |
10.12 | ** | |
10.13 | ** | |
10.14 | ** | |
10.15 | ** | |
10.16 | ** | |
10.17 | ** |
89
Exhibit No. |
| Description |
|---|---|---|
10.18 | ** | |
10.19 | ** | |
10.20 | ||
10.21 | ** | |
10.22 | ** | |
10.23 | ** | |
10.24 | ** | |
10.25 | ** | |
10.26 | ** | |
10.27 | ** | |
90
Exhibit No. |
| Description |
|---|---|---|
10.28 | ** | |
10.29 | ||
10.30 | ** | |
10.31 | ** | |
10.32 | ** | |
10.33 | ** | |
10.34 | ** | |
10.35 | ** | |
10.36 | ** | |
10.37 | ** | |
10.38 | ** | |
91
Exhibit No. |
| Description |
|---|---|---|
10.39 | ** | |
10.40 | ** | |
10.41 | ** | |
10.42 | ** | |
10.43 | ** | |
10.44 | ** | |
10.45 | ** | |
10.46 | ** | |
10.47 | ** | |
10.48 | * | |
92
Exhibit No. |
| Description |
|---|---|---|
10.49 | ||
10.50 | ||
10.51 | * | |
10.52 | ***+ | |
10.53 | ||
10.54 | * | |
10.55 | ||
10.56 | ||
10.57 | ||
10.58 | ||
10.59 | ***+ |
93
Exhibit No. |
| Description |
|---|---|---|
21 | *** | |
23.1 | *** | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm. |
31.1 | *** | |
31.2 | *** | |
32.1 | *** | |
32.2 | *** | |
101 | *** | The following financial information from our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 26, 2020, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) our Consolidated Balance Sheets as of December 31, 2019 and 2018, (ii) our Consolidated Statements of Operations for each of three years in the period ended December 31, 2019, (iii) our Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2019, (iv) our Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2019, (v) our Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2019, and (vi) the Notes to our Consolidated Financial Statements. |
104 | *** | Cover Page Interactive Data File (embedded within the iXBRL document) |
+ Certain identified information has been omitted from this exhibit because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed.
* Confidential treatment has been granted with respect to certain portions of this exhibit pursuant to Rule 406 of the Securities Act of 1933, as amended or Rule 24b-2 of the Securities Act of 1934, as amended. The omitted portions of this document have been filed with the Securities and Exchange Commission.
** Designates management contracts and compensation plans.
*** Filed herewith.
Note: Except as otherwise noted above, all exhibits incorporated by reference to the Registrant’s previously filed reports with the Securities and Exchange Commission are filed under File No. 000-26301.
ITEM 16. FORM 10-K SUMMARY
None.
94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
UNITED THERAPEUTICS CORPORATION | ||
By: | /s/ MARTINE A. ROTHBLATT | |
Martine A. Rothblatt, Ph.D. | ||
February 26, 2020 | Chairman and Chief Executive Officer | |
95
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures |
| Title |
| Date | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
/s/ MARTINE A. ROTHBLATT Martine A. Rothblatt | Chairman and Chief Executive Officer (Principal Executive Officer) | February 26, 2020 | ||||||||||||
/s/ JAMES C. EDGEMOND James C. Edgemond | Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) | February 26, 2020 | ||||||||||||
/s/ CHRISTOPHER CAUSEY Christopher Causey | Director | February 26, 2020 | ||||||||||||
/s/ RAYMOND DWEK Raymond Dwek | Director | February 26, 2020 | ||||||||||||
/s/ RICHARD GILTNER Richard Giltner | Director | February 26, 2020 | ||||||||||||
/s/ KATHERINE KLEIN Katherine Klein | Director | February 26, 2020 | ||||||||||||
/s/ RAYMOND KURZWEIL Raymond Kurzweil | Director | February 26, 2020 | ||||||||||||
/s/ NILDA MESA Nilda Mesa | Director | February 26, 2020 | ||||||||||||
/s/ JUDY D. OLIAN Judy D. Olian | Director | February 26, 2020 | ||||||||||||
/s/ CHRISTOPHER PATUSKY Christopher Patusky | Director | February 26, 2020 | ||||||||||||
/s/ LOUIS W. SULLIVAN Louis W. Sullivan | Director | February 26, 2020 | ||||||||||||
/s/ TOMMY G. THOMPSON Tommy Thompson | Director | February 26, 2020 | ||||||||||||
96