Focus Article: United Therapeutics Corporation (UTHR)

United Therapeutics (UTHR) $43.24

United Therapeutics 2010 Annual Report Cover

United Therapeutics 2010 Annual Report Cover

Over the course of the last decade, I have sifted through hundreds of companies looking at their business models, poring over their financial statements, reading their annual reports and evaluating their potential as an investment. In all this time, there has not been a single company that has turned out to be unique on so many fronts as United Therapeutics.

As a general rule of thumb I tend to avoid biotech stocks but the more I looked into United Therapeutics, the more intriguing it turned out to be. What initially drew me to the company were the recent insider purchases by CEO Martine Rothblatt. The combination of 30%+ organic revenue growth for nine consecutive years, reasonable valuation, projected revenue growth from $750 million in 2011 to $1 billion by 2013 based solely on currently approved drugs and a stock buyback plan were other factors that drew me in. An added bonus was a very unique annual report in comic book format. I kid you not about the comic book format, you can check it out here (PDF). Finally the presence of inventor and “futurist” Ray Kurzweil on the board of directors adds another exciting dimension to this company.

The Company:

United Therapeutics Corporation is a biotechnology company that focuses on the development and commercialization of products to address the needs of patients with chronic and life-threatening cardiovascular and infectious diseases and cancer. The company’s lead product, Remodulin, is approved in the U.S. and various countries around the world for the treatment of pulmonary hypertension (PAH), a disease that causes very high blood pressure between the heart and the lungs. It is a disease that mostly affects young women in the prime of their life and incidentally the CEO’s daughter also happens to suffer from this ailment.

Remodulin sales accounted for $115 million or 57% of total sales of $201.7 million in the third quarter of 2011. Approximately 13 to 15% of Remodulin sales come from Europe. Remodulin has been on the market for 9 years and continues to show single digit growth but the company’s other products to treat PAH, Tyvaso and Adcirca, are growing rapidly with 36% and 99% year-over-year growth respectively.

United Therapeutics also develops Glycobiological Antiviral Agents for the treatment of infectious diseases, such as Hepatitis C. The company has a strong IP position with patents on current revenues valid through 2017, patents on inhaled revenues valid through 2018 and patents covering oral revenue streams valid through 2026.

Currently trading at $43.24, UTHR is 38.87% below its 52-week high of $70.74 and 18.3% above its 52-week low of $36.55. The company has a market cap of 2.52 billion. Insiders currently hold 5.3 million or 9.3% of outstanding shares.

Insider Buying:

Dr. Rothblatt founded United Therapeutics in 1996 and has served as Chairman and Chief Executive Officer since its inception. She also founded and served as Chairman and Chief Executive Officer of Sirius Satellite Radio prior to United Therapeutics. She is a co-inventor on three of the company’s patents pertaining to treprostinil. She picked up 77,209 shares for an average price of $41.88 for a total of $3.23 million. She picked these shares up in multiple transactions since the start of the month, including as recently as last Friday, and ended up increasing her stake by 13.62%

Business Statistics and Financials:

Year Incorporated: 1996

Number of employees: 520

Annual sales (2010): $603.8M

Annual sales growth: 63.3%

Gross Margins (2010): 87.8% (87.7% in 2009)

Gross Margins (Q3 2011): 88.8%

Operating Margins (2010): 27.2% (7.03% in 2009)

Operating Margins (Q3 2011)*: 51.04%

Net Margins (2010): 17.5% (5.3% in 2009)

Net Margins (Q3 2011)*: 41.8%

Quick Ratio: 1.88

*Operating and net margins in Q3 2011 were positively impacted by non-cash income adjustments related to the drop in the stock price in the third quarter. This non-cash adjustment was related to the company’s stock compensation plan.

The company reported total revenues for the quarter ended September 30, 2011 as $201.7 million, up from $168.6 million for the quarter ended September 30, 2010. Net income for the quarter ended September 30, 2011 was $84.4 million or $1.45 per basic share, compared to $39.7 million or $0.70 per basic share for the same quarter in 2010. Earnings before non-cash charges for the quarter ended September 30, 2011 were $100.8 million, compared to $99.3 million for the quarter ended September 30, 2010.

United Therapeutics has a strong balance sheet with $695 million in cash and short-term investments and $317 million in total debt. The Current Ratio (current assets/current liabilities) is 2 and the Quick Ratio is 1.88.

Pipeline:

The company’s pipeline from a presentation United Therapeutics did at UBS healthcare conference is given below. Please note that some fo these products are essentially different delivery mechanisms for the same drug. For example Remodulin is currently approved for delivery both intravenously and subcutaneously in the U.S. but only subcutaneously in Europe. The use of Remodulin doubled in the U.S after it was approved for intravenous delivery as there is pain associated with subcutaneous administration of the drug. An implantable pump to deliver Remodulin is in phase III trials and is currently in use by about 50 patients.

United Therapeutics Pipeline Q2 2011

United Therapeutics Pipeline Q2 2011

Stock Buyback: 

The company’s board of directors approved a $300 million stock buyback program in October, representing nearly 13% of the company’s market cap of $2.32 billion at the time of the announcement. The company indicated that it would issue $250 million in convertible notes due 2016 to cover part of this purchase. To avoid dilution from the conversion of these notes in 2016, the company also plans on entering into a covertible note hedge transaction.

This combination of insider purchases and a stock buyback program is a signal that the stock is trading below management’s perception of its fair value.

Valuation (Comparative Ratios and Discounted Free Cash Flow Analysis):

P/E 14.44
Forward P/E 10.86
Price/Sales 3.39
Price/Book 2.26
EV/EBIDTA 7.45

The company saw its stock drop sharply in August following a disappointing trial of its experimental lung-disorder drug. The company held a special call to discuss this development and to reiterate that even without this drug, the company is maintaining its revenue guidance of $750 million, $875 million and $1 billion for 2011, 2012 and 2013, respectively, give or take 5%.

Current estimates for full year 2011 earnings are $3.65/share and $3.91 for full year 2012 earnings, representing earnings growth of just 7.12%. Revenue is expected to grow 24.21% in 2011, 16.67% in 2012 and 14.28% in 2013.

Using a discount rate of 10% and assuming 7% earnings growth for the next 5 years and a terminal growth rate of 2%, I get a value of $57.34 for the stock using Discounted Free Cash Flow analysis. This implies that the stock is trading at a 33% discount to fair value under conservative growth assumptions. Even after dropping the terminal growth rate to 0%, I get a value of $48.60 for the company.

Risk Factors:

The company’s reliance on multiple products that treat a single disease for its revenue stream is a risk factor that should be kept in mind while investing in the company. The total market for the company’s approved drugs is also limited. The company’s market size is about 30,000 patients in the U.S, 20,000 patients in Japan and 10,000 patients in China.

Conclusion:

These insider purchases by Dr. Rothblatt do not appear to be a case of insiders attempting to “paint the tape” and the company fits the GARP (growth at a reasonable price) bill quite well.

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