Background: United Therapeutics (UTHR) is a leader in treating the devastating orphan disease of primary pulmonary hypertension (PPH). The company announced earnings Thursday, July 25. It reported record quarterly sales and record Q2 earnings, both beating expectations and providing the fuel for the shares to surpass their 2011 all-time high Thursday and again Friday. The company is guiding for about $1 B of sales this year. The P/E is about 12.5 and the market cap is around $3.6 B.
Despite a rapid historical growth rate from a standing start in the 1990s, and a potentially bright future, UTHR trades at a significant P/E discount to the general market. This discount to the general market, not to mention the pricey biotech sector, may outweigh the several material uncertainties attendant to this company's business prospects.
Given my background as a cardiologist with pharmaceutical industry experience, United Therapeutics is of special interest to me. It will take some time to prepare a detailed discussion of the company. Because of UTHR's new-found price momentum in a momentum market, the goal of this article was to simply provide a timely overview of UTHR following the earnings-related share price upside move.
Trading considerations: I went long UTHR on the breakout to an all-time high on the earnings news Thursday, July 25. My reasoning was that corporate sales and earnings had reached record levels in 2012 even while the shares had failed all year to reach highs reached not only in 2011 but also in 2010. Thus the breakout to an all-time high price last week represented P/E reversion from a depressed level. Value Line reports that UTHR's average P/E for 2012 was only 8.7.
Of note, there is a high short interest in UTHR.
As of July 15, the short interest was as follows:
|Settlement Date||Short Interest||Avg Daily Share Volume||Days To Cover|
As of June 30, there were 49.8 million shares outstanding (52.7 fully diluted). More than 14% of shares had been sold short as of July 15.
In UTHR, the shorts are going after shares that are largely held by institutions and insiders who have done their homework before buying and holding. Yahoo Finance reports that institutional and mutual funds own 118% of the float. (Short-sellers and strategic insiders would account for this number being well over 100%, assuming that the Yahoo calculation is correct.)
There are, of course, important risks here, as is almost universal to shares of biotech companies. Some risks to the stock include: non-diversified product line, uncertain pipeline success, heavy insider selling, an ongoing patent challenge from Sandoz to the company's best-selling product (see below), and generic competition due to expiration of regulatory marketing exclusivity. I'm unaware of any challenges to the company's accounting or of any inappropriate conflicts of interest.
The stock was jolted last year when its NDA filing for oral Remodulin was unexpectedly rejected by the FDA. The company has responded by pressing its existing case for marketing approval with the FDA while also performing an additional, more robust clinical study. UTHR has a pipeline of improved formulations, new products, and delivery systems that it believes could lead to much greater sales than its current run rate around $1 B yearly.
As of the close of trading Friday, every short seller was sitting on a loss. This may provide additional volatility to the stock.
Trading history: In 2011, UTHR joined the ranks of stocks that spiked high in the Y2K era but eventually went on to set new highs. The stock has now surpassed that high (chart from Yahoo! Finance):
Past share price performance does not guarantee future success, of course.
The company: UTHR has an extraordinary history and I believe, an extraordinary leader. Martine Rothblatt, the CEO and co-founder, had a daughter who developed PPH, a rare fatal cardiopulmonary illness that primarily afflicts younger women. Rothblatt, an attorney and visionary in the field of space communications, refocused on PPH and co-founded UTHR.
The company has three drug products on the U.S. market to treat PPH. These are Remodulin, Tyvaso, and Adcirca. The company's January presentation provides a good basic overview of its products and business plan.
International expansion is ongoing.
Recent results: The company had a blowout Q4 in 2012, with EPS of $1.60 and then-record sales of $244 M. This year, Q1 was below consensus at $1.19, but last week, Q2 sales and EPS beat expectations, though EPS were still a bit below Q4 at $1.52 per share. Trailing 12-month earnings are well into record territory, though, as are sales.
Sales progress in Q2 was due to a greater number of patients treated rather than from price increases.
The CEO sounded a bullish note on the post-earnings release conference call. From the end of Seeking Alpha transcript:
So all told, never before has our pipeline been so mature with about $2 billion in revenue potential, on top of the $1 billion, that revenue run rate that we're putting out to date.
Before that closing point, Ms. Rosenblatt provided details on how UTHR hopes to leverage its existing products, plus the oral formulation of Remodulin, to grow sales substantially.
The company is optimistic that Remodulin, the subject of the Sandoz patent challenge, is progressing on schedule in a clinical trial using a Medtronic (MDT) implantable pump. It believes this product could materially enhance sales. In the conference call, it also addressed that patent litigation by professing satisfaction with a ruling on the Markman hearing for this case (which addresses claims construction). Additionally, the company updated investors as to why it believes that it is more optimistic than before that the company's NDA for the oral version of Remodulin could be approved without having to provide additional clinical trial data.
Discussion: UTHR set out audaciously less than twenty years ago to enhance human health by treating a condition that had been deemed untreatable, and has done just that, generating substantial financial profitability while doing so. Amongst biotech companies, one often sees hopeful story after hopeful story, sometimes from companies older than United Therapeutics, always with promise - but too often with no product approvals. Yet many of these companies have billion dollar valuations. Meanwhile, UTHR went from deficit and no revenues in 1999, when it went public, to profitability in 2004. Next year, EPS are anticipated to be more than 20X that of 2004.
The growth-and-value buyer in me is intrigued by the low relative valuation for a company that has achieved so much in such a short time.
Per Yahoo! Finance, consensus earnings growth for the next 5 years is reported as 40% per year; Value Line projects 15% per year. (Value Line, however gives the stock an enormous 3-5 year upside price projection of $140-215, thinking that the P/E should be much higher.) The stock is projected to end 2013 with a book value around $26/share.
Investors in UTHR hope to benefit over time from the combination of higher profits and a higher P/E.
Beyond its PPH franchise, potential intermediate-term upside comes from an orphan oncology drug product being developed under license with the National Cancer Institute. Even though this targets a very rare disease, neuroblastoma, UTHR is small enough that profits from this product, if approved for marketing by the FDA, might be material (see link to pipeline, above).
Risks: The risks to the shares were important enough to summarize near the beginning of the article. The fundamental value of this company is unknowable. It is possible for the Remodulin patent litigation go badly and for the company's pipeline to be disappointing.
The company also announced last week that due to the record high share price, it is suspending its share buybacks. This would appear to signify that the stock in its view is no longer cheap.
Summary: UTHR is a financially-strong, free cash flow-positive biotech company focused on an important orphan disease, with an evolving focus in oncology. It is trading at a market discount. Because it is primarily focused on one particular illness, it may be relatively easier for an investor to research than a more diversified company.
The company is growing its market share within the PPH market in the U.S. while expanding internationally. Well over 10% of the share count has been sold short. This degree of short interest suggests that the risks of the stock, especially at the current record price, may be considerable, but this consideration may be balanced or outweighed should they cover en masse.
For the above reasons, both buy-and-hold investors and traders may be interested in looking more closely into UTHR.