United Therapeutics Looks To Develop Inhaled Adcirca - A Deeper Look

About: United Therapeutics Corporation (UTHR), Includes: ARNA, LQDA, MNKD
by: Spencer Osborne

It appears that the undisclosed compound in the deal between United Therapeutics and MannKind is Adcirca.

Adcirca is used to treat PAH.

Adcirca has the same active ingredient as Cialis.

When United Therapeutics (NASDAQ:UTHR) signed a deal with MannKind (MNKD) for a dry powder inhaled form of Treprostinil, the company also contracted an undisclosed compound within the PAH space. With United's most recent update of its pipeline page, it appears that the undisclosed compound is Adcirca.

Chart Source - Spencer Osborne (via United Therapeutics)

The move makes a lot of sense for United when one considers that Adcirca has now gone generic with both Mylan (NASDAQ:MYL) as well as Teva (NYSE:TEVA). Before going into some detail, there seems to be a need to discuss the elephant in the room. That elephant is that the active ingredient in Adcirca is the same active ingredient that is used in Cialis. United Therapeutics is only licensed for marketing Adcirca for PAH. Thus, any thought about huge sales from the Erectile Dysfunction space should be put on the shelf and out of mind. United Therapeutics investors realized this long ago, but the discussion is now bound to arise because MannKind investors seem to reach for anything to sell the MannKind story.

First things first. Cialis comes in doses between 5mg and 20 mg. Adcirca is only dosed at 20 mg. Can a doctor script off label? Yes. Does it happen at a level that makes a huge impact on the bottom line? Not really.

With that behind us, we can now look at the competitive landscape. Both Mylan and Teva have launched a generic Adcirca. The Mylan version is called IQVIA, while the Teva version is called ALYQ. Mylan launched its version in mid-2018, while Teva launched last month.

Adcirca had sales of $323 million in 2018, down from $420 million in the year prior. There is already pressure happening from generics within the space. While United has the power of its brand and the foundation it built, it is very likely that the company was seeking another way to differentiate itself. An inhaled version may be worthwhile.

Back in 2017, United and Eli Lilly (NYSE:LLY) extended the deal between them with regard to Adcirca. The terms of the deal will see United paying a milestone of $325,000 per million in net revenue, plus a 10% royalty. If we add a royalty which MannKind will garner for its inhaled version, then the margins on Adcirca may not be as appealing as same investors think when reading the net revenue numbers. That being said, keeping hold of market share has its value as United awaits final clinical trials, approval, and launch of its potential blockbuster Ralinepag, licensed from Arena Pharmaceuticals (ARNA). The new deal with Lilly expires at the end of 2020, so investors should consider that carefully when assessing what will ultimately happen with Adcirca.

If United and its partner MannKind can fast-track an inhaled version of Adcirca, and if it has attributes that make it viable for keeping or even increasing market share, then we will likely see Lilly and United back at the negotiation table. With that said, if an inhaled Adcirca is showing good data, the very same companies that create generic Adcirca in pill form could chase down an inhaled version of their own. A company like Liquidia (LQDA) is attempting to enter the Treprostinil space already and is about 12 months ahead of the United/MannKind team on the FDA approval timeline. It is possible that Liquidia becomes a go-to player for companies like Mylan and Teva in their quest to create generic versions of the same drug.

In its deal with MannKind for Adcirca, United has about $40 million at risk. It already put up $10 million, so it would be two $15 million milestones that would be at risk. Essentially, United has bought some time to assess its options. If the inhaled version of Adcirca can allow United to maintain its share or at least stop the erosion of share, it could be well worth the expenditure. The company acknowledges the early impact of generic pills and acknowledges that the margins on the drug are a lot less impressive now. Every $1,000,000 in Adcirca sales will see $325,000 go out in milestone fees. Then, there is a 10% royalty on the pill form and possibly 20% royalties on the inhaled form, consisting of 10% to Lilly and 10% to MannKind. In simple terms, it is possible that 52.5% of revenue goes right back out the door. When you start to deduct selling costs, etc., you can see that the move to an inhaled Adcirca is defensive in nature and perhaps will serve as another bridge, along with inhaled Treprostinil, until Ralinepag approval.

What has essentially transpired with United Therapeutics is the company has navigated its way through difficult times with regard to patent life, developed a near-term strategy to, at a minimum, preserve market share, and has embarked on a longer-term strategy with Ralinepag.

From an investment standpoint, I think that people need to watch and see the sales numbers for Adcirca in the first two quarters of 2019. If the numbers dip more quickly than anticipated, it becomes critical to see how quickly the inhaled DPI solutions can be brought to market as well as how quickly Ralinepag can realistically advance. United has bought itself some time with its PAH portfolio, but it is not yet in an ideal situation. The street will be watching the first half of 2019 closely. Stay tuned!

Disclosure: I am/we are long ARNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.