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United Therapeutics (NASDAQ:UTHR)

Q4 2011 Earnings Call

February 14, 2012, 9:00 a.m. ET

Executives

Martine Rothblatt - Founder, Chairman and CEO

Roger A. Jeffs - President, COO and Director

John M. Ferrari - CFO, Principal Accounting Officer and Treasurer

Andy Fisher - EVP

Analysts

Salveen Richter – Collins Stewart

Liana Moussatos – Wedbush Securities Inc.

Geoff Meacham – JPMorgan

Mark Schoenebaum (Omar) – ISI Group, Inc.

Robyn Karnauskas – Deutsche Bank AG

Philip Nadeau – Cowen and Company, LLC

Terence Flynn – Goldman Sachs

Robbie (Merofa) – Credit Suisse

Bret Holley – Oppenheimer & Co.

Matthew Kaplan (Susan) – Ladenburg Thalmann & Co.

Operator

Good morning. My name is Ben and I will be the conference operator today. At this time, I would like to welcome everyone to the United Therapeutics Corporation Fourth Quarter and annual 2011 financial results earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. [Operator Instructions].

Remarks today concerning United Therapeutics will include forward-looking statements, which represent United Therapeutics' expectations or beliefs regarding future events based on current assumptions. United Therapeutics cautions that such statements involve risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements.

Consequently, all such forward-looking statements are qualified by the cautionary language and risk factors set forth in United Therapeutics' periodic and other reports filed with the SEC. There can be no assurance that the actual results, events or developments referenced in such forward-looking statements will occur or be realized. United Therapeutics assumes no obligation to update these forward-looking statements to reflect actual results, changes and assumptions or changes in factors affecting such forward-looking statements. Thank you.

Dr. Rothblatt, you may begin your conference.

Martine Rothblatt

Thank you, operator. Good morning to everybody here in North America, and good afternoon or evening to our friends overseas.

I am pleased that we have met our annual revenue target for 2011, which highlights the favorable operating results that we’ve enjoyed this past year.

In addition, we are reaffirming today, our revenue guidance for 2012 and 2013, as revenues from our commercial product lines continue to grow.

I’m pleased to be joined on the call this morning’s conference call by three of our top level executives, Dr. Roger Jeffs who is our President and Chief Operating Officer, and is responsible for clinical development as well as sales and marketing will be joining me this morning and can help field the questions. John Ferrari who is our Chief Financial Officer, and is also responsible for all matters relating to distribution of our product, is also on the call and will be happy to field any questions. And finally, Andy Fisher, who is our Executive Vice President in charge of intellectual property, as well as our Chief Strategy Officer, will also be joining us, and he can help out with any questions relating to IP or strategic matters.

Operator, if you could please open the lines, we can now take the callers’ questions.

Operator, if you could please now open the lines to any questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question today comes from the line Salveen Richter from Collins Stewart. Your line is now open, please go ahead.

Salveen Richter – Collins Stewart

Good morning. Thank you for taking my question. I just wanted to get a sense of what accounted for the negative quarter-over-quarter growth for Remodulin and Tyvaso in 4Q. And then also looking at 2012 guidance, where do you see the majority of the 17% year-over-year revenue growth coming from?

Martine Rothblatt

Thanks for those questions. I would say both of those fall more in the sales and marketing category, so I'm going to ask Dr. Jeffs, our President, to kindly address those.

Roger A. Jeffs

That you, Martine. The way, as we said before, that there is quarter-to-quarter fluctuation in ordering patterns from our main customers, which are the specialty pharmacies. And I think this quarter is reflective of normal variations within quarters.

When we look going forward into 2012, we see the majority of the growth coming from Tyvaso and Adcirca in terms of incremental revenue addition. However, the core base of Remodulin revenue, we expect to remain stable and grow slightly as well. So we think there should be growth within the full suite of products that we sell and we remain confident on guidance for 2012 at the 875 range as previously stated.

Martine Rothblatt

Thanks, Roger. Thank you, questioner from Collin Stewart. Operator, could you please open the line to the next question.

Operator

Absolutely. Our next question comes from the line of Liana Moussatos from Wedbush Securities. Your line is now open, please go ahead.

Liana Moussatos - Wedbush Securities Inc.

Thank you for taking my question. Can you give us the geographic breakdown of Remodulin sales, Europe and U.S.?

Martine Rothblatt

Thanks Liana, nice to hear your voice this morning. I think it probably would be more in John Ferrari's category to give the breakdown of revenues ex-U.S. and U.S. So John could you please help with that question?

John M. Ferrari

I'd be happy to. We haven't seen any significant fluctuation between U.S. and non-U.S. sales for Remodulin that we reported over the years, so somewhere between 13 and 15% of our Remodulin revenues come the rest of the world or outside the U.S.

Martine Rothblatt

Thanks, John. Thanks, Liana. Operator, can you please take the next question?

Operator

Absolutely. Our next question comes from the line of Geoff Meacham from JPMorgan. Your line is open.

Geoff Meacham - JPMorgan

Good morning, guys, thanks for taking the question.

Martine Rothblatt

Sure thing, Jeff.

Geoff Meacham - JP Morgan

So if I read Roger's comments correctly, with growth for the Remodulin franchise, I know this year you'll be launching in Europe, so should we infer for tha, A, that you think that the European uptake in year one's going to be somewhat modest; and B, maybe give us a broader sense for what that opportunity looks like in several years? Do you think that could ever match the U.S. in terms of utilization of IV subcue prostacyclin? Thanks.

Martine Rothblatt

Thanks, Geoff, I think that question is also squarely in the sales and marketing area, and gives Roger a nice chance to speak about not only Europe, but some of the other markets that I think are looking forward to Remodulin. So Roger could you take that question please?

Roger A. Jeffs

Sure, Martine, and thanks for the question, Geoff. Still I think if we just look historically at the U.S. market, intravenous approval results in a supplementing of the commercial opportunity, once that product was maximized in the market.

So we would also expect an opportunity that would be similar in Europe, albeit, it'll be a gradual period of upswing over a period of several years.

Now, I think we all must realize that there are certain factors that could mitigate this trajectory that are unique to the European market, such as governmental charity programs, which could mandate price reductions for pharmaceuticals in general. And importantly to us, our need to maintain our pricing structure for subcutaneous Remodulin. So whether we seek pricing approval for intravenous is going to be dictated on what we feel the pricing negotiation would be and how the outcome of that would impact subcutaneous pricing structure which we want to maintain.

I think the other thing, which Martine alluded to is we are pricing very hard both in China and in Japan. We start bringing in Asian revenue that we think this year it is possible to get SFDA or the Chinese government authority to approve Remodulin, if all goes well. If all goes not as well, then we'll need to do a bit of a bridging study. And in Japan our very good partner, Mochida Pharmaceuticals, is completing the last part of their patient enrollment in their bridging work. And they think they will complete that by the end of this year and application will be submitted either late this year or early 2013, and then we would expect to launch in Japan in 2014.

The opportunities we think in Japan and China in total have another doubling opportunity, so if you look at, compared to Europe, so if you look at subcue revenues in Europe, we think there's a chance, over a period of time, to potentially double revenues with IV approval. And then with the Asian markets opening up, we think there's another opportunity to significantly gain global revenue. Then when we look at our contributions that John talked about, that global revenue for Remodulin, we think that will increase over the coming year.

Martine Rothblatt

Thanks Roger, that was great color on the question by Geoff and Geoff, hopefully you found that very responsive. Operator can you please open up the lines for the next question?

Operator

Our next question comes from the Mark Schoenebaum for ISI. Your line is open.

Mark Schoenebaum (Omar) – ISI Group, Inc.

Hi guys, this is Omar filling in for Mark. A question on the ongoing discussions on the oral Remodulin filing in U.S., and if you could help us give context on the CQ trial, and if that was something that stemmed out of these discussions? Thanks.

Martine Rothblatt

Thanks, Omar, that question is, of course, is clearly in the realm of clinical development, which Roger leads up that effort. Roger?

Roger A. Jeffs

Thanks, Omar. We filed the NDA on December 27, 2011, so it was a very strong way in addition to IV approval in Europe to end 2011. The requirement for acceptance of that filing is a 60-day review period, which we are now approaching the end of, and then the FDA has up to Day 74 to notify us that on technical and format aspects of the filing, if it's accepted for review. We're very confident that the NDA will be accepted for review.

Your second question was whether or not 3 MC-cubed would be required for approval. At no point in time has 3 MC-cubed been a part of that discussion. We remain confident that the NDA as filed is approvable and that's our intent, and we remain optimistic on that. 3 MC-cubed, let me just give you little bit of background information on what that is. So that's a trial to evaluate the long-term benefits for oral treprostinil on time to clinical [Inaudible] when added very early in the course of therapy to background oral therapy, so a couple of different things here that in terms of trial design of combination therapy that we haven’t done in the past. One, is early addition along with other background, either ETRAs or PDE-5 inhibitors. And we’re looking at a much longer follow up period that we're going to look at the long-term benefits of oral treprostinil to the clinical outcome of the patients [Inaudible]. We think this drug gives us several advantages, an ability to achieve a higher dose over time and we think it will allow us to show that in early combination, which is where the true market opportunity is for oral treprostinil provides integral outcome to patients. So the numbers for this trial, it's not a small effort, it's going to be in excess of 800 patients enrolled globally. We think we can enroll those patients in about 2 years. So we're going to start enrolling the first half of 2012, which would dictate we would finish enrollment in the first half of 2014. We estimate that we will need about 400 events captured to have the power to find a positive outcome. And we think that's going to take another 1 to 2 years, so we believe we will unblind and file in the 2015 to 2016 timeframe.

Martine Rothblatt

Thanks, Roger, suburb coverage of the entire landscape. Operator, could you please open the line to the next question?

Operator

Our next question comes from the line of Robyn Karnauskas from Deutsche Bank. Your line is open, please go ahead.

Robyn Karnauskas – Deutsche Bank AG

Hi, guys. Thanks for taking my question. So [Inaudible] this morning was talking about their expectations [inaudible] to repeat market share being 40% in the U.S. I was just wondering, do you expect to see any impact in 2012 and what is your thoughts on the impact on Remodulin sales?

Martine Rothblatt

Thanks, Robyn, for your question. Once again, it’s in the sales and marketing area, so Roger, could you please address that?

Roger Jeffs

Yes, thanks for the question, Robyn. I won’t comment on [inaudible]’s expectations for their product other than I note that their share base right now is very low and they seem to be taking share principally from a Flolan base, which is an un-competed market, that’s not really detailed. We’ve seen no impact, as you can see in our revenues, on our Remodulin share or the revenue base that accounts with that.

So while I understand that that’s their goal, we seem very well protected in terms of our market for several reasons. One is, not only do we have the intravenous route approved, but we’re also approved for subcutaneous use and our share between our own product is about 50/50 IV and subcue. So there’s no way that they could actually infringe on the subcutaneous use of our product. Their goal would be to go after intravenous and I think the shortfall there for what they call their room-temperature stable product, which is stable up to 77 degrees, but not beyond, I believe, is the limitation there is the half-life of that product remains minutes. So discontinuation in therapy could be catastrophic for patients whereas the half-life for Remodulin is hours. So that’s a very different safety profile for the two products even given intravenously.

Further, we are in development of an implantable pump platform and that new platform is going to be exclusive to treprostinil in the sense that it takes a drug that’s highly stable and can be maintained inside the body, inside this pump for four months and retain stability for many, many months within the pump and I think that will be a short fall for the room temperature stable product that they are promoting.

So on several fronts, both [inaudible] and half-life and further invention, I think [inaudible] could fall short in terms of the market share that they articulated to day. But regardless, I think for our own expectations, we launch an IV agent market [inaudible] soon, we think Remodulin will provide continued benefit and then the further inventions around implantable pump technologies, I think also give us a unique and attractive market going forward.

Martine Rothblatt

Thanks, Roger. Thank you very much. Great response, interesting question. Next question please, operator.

Operator

Our next question comes from the line of Phil Nadeau from Cowen and Company. Your line is now open.

Philip Nadeau – Cowen and Company, LLC

Good morning. Thanks for taking my question. Question for Andy on IP. There’s obviously recently been a Paragraph 4 filing against Remodulin. Just talk a little bit about your strategy in defending the franchise and in particular, do you have other patents that aren’t in the orange book today that you could exert against the father?

Andy Fisher

Thanks for the question. As we disclosed on February 3rd, we were notified by Sandoz that they’re seeking to enter the market with a generic form of treprostinil and they’re challenging each of our three Orange Book listed patents which include a patent expiring in 2014 related to the method of treating PAH, patent expiring in 2017 related to the synthesis of a product by process, and a patent expiring in 2029 relating to the use of a specific [inaudible] with treprostinil. We do own additional patents covering different aspects of the use, manufacturer, and synthesis of Remodulin. We’re very confident in our patent estate and our plan is to obviously, vigorously defend those patents. We’re reviewing the claims of invalidity and non-infringement included in Sandoz’ notification. We have 45 days from the date of that notification to commence a law suit if we so choose. And we will continue that review during the 45-day period.

Martine Rothblatt

Thanks, Andy. Fantastic. Operator, could you please open the line to the next question?

Operator

Our next question comes from the line of Terence Flynn of Goldman Sachs. Your line is open.

Terence Flynn – Goldman Sachs

All right, thanks for taking the question. Just a follow up on Phil’s question. I was wondering this synthesis of the product by process patent for 2017, can you guys comment on why that patent is important and maybe implications for yield, and are there other methods by which other companies might be able to get around that patent through other manufacturing pathways?

Martine Rothblatt

Okay, Terence thanks for your question. Once again, Andy being in charge of IP, I think can answer that question best. Andy.

Andy Fisher

Sure. Thanks, Martine. Thanks for the question, Terence. The 2017 product by process patent does relate to the way we make treprostinil, the active ingredient in Remodulin. With respect to other potential processes, the – it’s difficult for us to speculate at this point until we learn more information. The – this is all a part of the normal process by which generic companies challenge branded companies and we think it’s best that we refrain from further comment about the specifics of their strategy until we understand exactly what that strategy is.

Martine Rothblatt

Okay, thanks. Thank you very much. Operator, if you could please open the line to the next question.

Operator

Our next question come from the line of Robbie (Merofa) from Credit Suisse. Your line is now open.

Martine Rothblatt

Operator, you got a B+ for effort on that one. Robbie, how are you? Hello. Credit Suisse?

Robbie (Merofa) – Credit Suisse

Can you hear me?

Martine Rothblatt

Yes, now we hear you good.

Robbie (Merofa) – Credit Suisse

Okay. I’m going to push the patent question. I’m not sure you’re going to answer this, but let’s go for it anyway. Very specifically, I guess you guys are aware of the synthesis claims by Alfora. Is it your understanding that’s part of the Sandoz Paragraph 4 and do your two assets which aren’t in the Orange Book, which you filed synthesis, you think protect you around that?

Secondly, could I ask you on a cost estimate for the CQ trial? And finally, could you just outline your category distribution policy for 2012, specifically your share buyback policy. Thank you.

Martine Rothblatt

Okay, that’s a lot of concatenated questions stacked into one. Why don’t we – let me just be a little traffic conductor here. Let’s start with Andy, if you could address his question with regard to various Orange Book patent listings. And while Andy’s doing that, Roger, if you could queue up to give a macro cost estimate on CQ. And while Roger’s doing that, John, if you could queue up to give the buyback answer. Andy?

Andy Fisher

Sure thing. Thanks for the question, Robbie. Good questions. We don’t have sufficient information at this time to answer your question about a relationship between Sandoz and Alfora. Obviously, we’re available – we’re mindful of the simultaneous DMF filing by Alfora on the same date that Sandoz filed their [inaudible]. But beyond that, we don’t really have any additional information about whether the two filings are related. We are also aware of other information relating to Alfora and their synthesis of treprostinil that I’m sure you are aware of as well and which is behind your question.

As far as alternate synthesis pathways and non-Orange Book listed patents held by United Therapeutics, again, those are publically disclosed and beyond that we’re really not at liberty to comment about their relevance to Sandoz’ filing at this time until we receive additional information about that filing.

Martine Rothblatt

Thanks, Andy, very much. And now let’s kick it over to Roger. Robbie was asking about what kind of expense you were looking at for the CQ study.

Roger Jeffs

That trial over it’s lifetime should be in the 20-plus million range and the reason that that number is what it is, it’s dependant by the number of patients that’s being studied, which is 800-plus, and then the length of the follow-up for each patient, which could be several years. So we pay for a patient over not just the course of the 12-week study but over the period of several years, so that impacts the price in that study. We feel that spending, however, is within our bandwidth and while the future years might increase, you won’t see a major impact on our historical budget spending trends on R&D as a result of this study.

Martine Rothblatt

Thanks, Roger. And last but not least, John. The question was how are we doing with the buyback?

John Ferrari

As you would recall, we entered into an accelerated share repurchase program in October in during which initially we received 4.million shares of our stock back. That program is still active, it will settle sometime during the second quarter. And depending on our average stock price between October and the settlement date, we may get some additional shares back. However, the Board also authorized a $300 million, you know, repurchase program of which we used $212 million on the ASR, so we do have $88 million that we could buy additional shares back and it is an active fall process, you know that we’re ongoing with management on timing for buying back additional shares.

Martine Rothblatt

Thanks, John. Thank you very much. Operator, could you please open the line to the next question?

Operator

Our next question comes from the line of Bret Holley from Oppenheimer. Your line is open.

Bret Holley – Oppenheimer & Co.

Yes, thanks for taking the question. I have a follow-up to Jeff’s question on European –on the European launch. I’m wondering, Roger, you said you wanted to maintain your cost structure and I’m wondering where is your level of sensitivity? Where’s the threshold in which you might walk away from the individual European countries as for as discounts they might ask for?

Roger Jeffs

We have a cost structure that we’d like to maintain, frankly, so what we’re trying to do is only enter into pricing negotiations where we feel we are confident that we can maintain the Remodulin vial price because it’s the same product. So what we would not like to do, for example, is get into a country and have to go through renegotiation of price and then if it was a major country, which other countries then referenced off of it could then domino into that country. So just as every major pharma and biotech company does, we are trying to triage and strategize around which countries we’re going to selectively and negotiate pricing approvals particularly in the first stages and then things can change and going forward we will continue to try to preserve the current pricing structure that we have in each of our major markets.

Martine Rothblatt

Thanks, perfect, Roger. All right, operator, it looks like we have time for one, possibly two more short questions. Next question?

Operator

Our next question comes from the line of Matt Kaplan from Ladenburg Thalmann. Your line is now open.

Matthew Kaplan (Susan) – Ladenburg Thalmann & Co.

Hi. This is Susan calling in for Matt.

Martine Rothblatt

Hi, Susan.

Matthew Kaplan (Susan) – Ladenburg Thalmann & Co.

Hi. Can you please provide us with an update on your plans for the Tyvasco monotherapy trials in Europe?

Martine Rothblatt

Okay, thanks, Susan. That also would be in the clinical development area, so I’ll ask Roger to please answer that.

Roger Jeffs

Yes, Susan, good morning. So we are progressing forward with also a time to clinical origin study with Tyvasco that will be conducted mainly in Europe. It’s not a monotherapy trial, patients will be allowed to be on background therapy with the sequential addition of Tyvasco to patients. On that ground, orals and [inaudible] therapies and then we’ll look at the long-term impact of Tyvasco therapy on [inaudible]. As everybody is probably aware, European regulators are keen to see time to clinical worsening as a primary end point that we’re trying to satisfy that need. However, we’re also doing, as our primary end point, changes in [inaudible] distance. But we’re going to have to have on time to clinical worsening. So it’s a large trial with large follow up with them. Principally, at the primary end point [inaudible] at six months and then often has the ability to look at time to clinical worsening beyond that.

Martine Rothblatt

Thanks, Roger. All right, Operator, we have time for one last question.

Operator

And our final question is a follow up from the line of Liana Moussatos with Wedbush…

Martine Rothblatt

Okay, all the way around. Hi, Liana.

Liana Moussatos – Wedbush Securities Inc.

Hi. How should we think about taxes and tax credits going forward with increased ex-U.S. sales?

Martine Rothblatt

Yes, very insightful question, and fortunately we’ve got a real guru on that subject with John Ferrari on the call. John?

John Ferrari

Thank you, Martine. The tax credits are generated by our – I guess research and development operations in the U.S., which by far is where we spend most money. So the revenues from ex-U.S., you know, are billed and collected in U.S. dollars to actually United Therapeutics so we don’t – the interaction between getting revenues from outside the U.S. and our ability to generate tax credits are really, I guess two different animals.

So our expectation is that we will continue to develop business and R&D credits, especially as we continue to do research in the orphan drug area, which pulmonary hypertension is. So you know, while we’re using them, we’re still generating a fairly healthy amount of tax credits and I would expect that we’ll continue to generate tax credits on an ongoing basis for a while.

Martine Rothblatt

Thanks, John. Thanks, Liana. We’ll let me wrap up now as we’ve reached the half hour point. It’s been a good array of questions and I thank my colleagues, Roger, Andy and John for helping out to them.

I will summarize sort of from the 30,000-foot view here what we’ve talked about. I think there are four, probably, take-home messages. First, revenues will continue to increase and hence, we have restated our guidance going forward. Secondly is that expenses will stay relatively flat, and hence, operating margins and cash profits will also continue to increase.

The third take-home message is that we’re going to continue to reduce outstanding shares and this should enable cash profits per share to also continue to increase. And fourth, but perhaps most exciting going forward is that the broad post-Europe potential inherent in our pipeline the use of oral prostacyclin analogs in combination with other therapy will continue to get closer to realization especially as our reinitiated oral prostacyclin combination studies, as Roger described, move through their enrollment process and within the next few years reach unblinding.

So everything at United Therapeutics is looking real good to date. Going forward, our call franchises are going to continue to provide both growth and increased operating leverage. And then after the very near-term period, we look forward to bringing our pipeline into fruition and moving revenues to the full potential that oral prostacyclin as a combination therapy has in the pulmonary hypertension market.

Thanks so much for everybody’s attention this morning, and we look forward to talking with you at upcoming healthcare conferences.

Operator, you may not disconnect.

Operator

Ladies and gentlemen, thank you for participating in today’s United Therapeutics Corporation’s fourth quarter and annual 2011 financial results earnings conference call. This call will be available for replay beginning at 12:00 p.m. Eastern Standard Time today through 11:59 p.m. Eastern Standard Time on Tuesday, February 21. The conference ID number for the replay is 46781201. The number to dial in for the replay is 855-859-2056 or 404-537-3406.

Again, thank you for your participation and you may all disconnect. Moderators, please stand by for transcript.

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