On April 26, 2017 United Therapeutics Corporation (NASDAQ: UTHR) reported its financial results for the first quarter ended March 31, 2017 (Press release, United Therapeutics, APR 26, 2017, View Source [SID1234518691]). Schedule your 30 min Free 1stOncology Demo! "Our quarterly financial growth trends are slower than we would like as we are seeing more patients stay longer on front-line pulmonary arterial hypertension (PAH) therapies," said Martine Rothblatt, Ph.D., United Therapeutics Chairman and Chief Executive Officer. "Due to the progressive nature of this disease, we believe that this building backlog of PAH patients ultimately will transition to more advanced therapies, such as Orenitram, Tyvaso and Remodulin. As the PAH patient backlog dynamics unfold, we are continuing to invest in our growing product pipeline of late stage programs in cardiopulmonary diseases and oncology and also in regenerative medicine and organ manufacturing to ultimately find a cure for PAH."
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Key financial highlights include (dollars in millions, except per share data):
Three Months Ended
March 31,
Percentage
2017
2016
Changes
Revenues
$
370.5
$
369.0
—
%
Net income
$
178.6
$
235.5
(24)
%
Non-GAAP earnings(1)
$
165.7
$
141.9
17
%
Net income, per diluted share
$
3.89
$
4.84
(20)
%
Non-GAAP earnings, per diluted share(1)
$
3.61
$
2.91
24
%
(1) See definition of non-GAAP earnings, a non-GAAP financial measure, and a reconciliation of net income to non-GAAP earnings below.
Financial Results for the Three Months Ended March 31, 2017 compared to the Three Months Ended March 31, 2016
Revenues
The following table presents the components of total revenues (dollars in millions):
Three Months Ended
March 31,
Percentage
2017
2016
Change
Net product sales:
Remodulin
$
145.8
$
139.8
4
%
Tyvaso
87.4
102.2
(14)
%
Adcirca
80.0
72.6
10
%
Orenitram
39.3
40.2
(2)
%
Unituxin
18.0
14.2
27
%
Total revenues
$
370.5
$
369.0
—
%
Revenues for the three months ended March 31, 2017 increased by $1.5 million compared to the same period in 2016. The growth in revenues resulted from the following: (1) a $7.4 million increase in Adcirca net product sales; (2) a $6.0 million increase in Remodulin net product sales; and (3) a $3.8 million increase in Unituxin net product sales. These increases were partially offset by a $0.9 million decrease in Orenitram net product sales and a $14.8 million decrease in Tyvaso net product sales.
Expenses
Cost of product sales. The table below summarizes cost of product sales by major category (dollars in millions):
Three Months Ended
March 31,
Percentage
2017
2016
Change
Category:
Cost of product sales excluding share-based compensation
$
15.8
$
12.6
25
%
Share-based compensation benefit(1)
(1.5)
(11.9)
87
%
Total cost of product sales
$
14.3
$
0.7
1,943
%
(1) Refer to Share-based compensation (benefit) expense below for discussion.
Research and development expense. The table below summarizes research and development expense by major category (dollars in millions):
Three Months Ended
March 31,
Percentage
2017
2016
Change
Category:
Research and development expense excluding share-based compensation
$
41.3
$
36.8
12
%
Share-based compensation benefit(1)
(5.1)
(37.2)
86
%
Total research and development expense
$
36.2
$
(0.4)
9,150
%
(1) Refer to Share-based compensation (benefit) expense below for discussion.
Selling, general and administrative expense. The table below summarizes selling, general and administrative expense by major category (dollars in millions):
Three Months Ended
March 31,
Percentage
2017
2016
Change
Category:
General and administrative excluding share-based compensation
$
53.5
$
78.2
(32)
%
Sales and marketing excluding share-based compensation
15.4
22.3
(31)
%
Share-based compensation benefit(1)
(12.5)
(95.5)
87
%
Total selling, general and administrative expense
$
56.4
$
5.0
1,028
%
(1) Refer to Share-based compensation (benefit) expense below for discussion.
General and administrative. The decrease in general and administrative expense of $24.7 million for the three months ended March 31, 2017, as compared to the same period in 2016, was primarily attributable to a $32.0 million decrease in charitable donations to non-affiliated, non-profit organizations that provide financial assistance to patients with PAH.
Share-based compensation (benefit) expense. The table below summarizes share-based compensation (benefit) expense by major category (dollars in millions):
Three Months Ended
March 31,
Percentage
2017
2016
Change
Category:
Share tracking awards plan
$
(24.6)
$
(147.9)
83
%
Stock options
4.6
3.1
48
%
Other(1)
0.9
0.2
350
%
Total share-based compensation benefit
$
(19.1)
$
(144.6)
87
%
(1) Includes expense related to restricted stock units for the three months ended March 31, 2017, and employee stock purchase plan for the three months ended March 31, 2017 and 2016.
Share tracking awards plan. We re-measure the fair value of share tracking awards at the end of each financial reporting period. Changes in the liability associated with share tracking awards resulting from such re-measurements are recorded as adjustments to share-based compensation (benefit) expense. Decreases in our stock price will generally result in a reduction in the share tracking award liability. The decrease in share tracking awards plan benefit of $123.3 million for the three months ended March 31, 2017, as compared to the same period in 2016, was primarily due to the smaller decrease in our stock price during the three months ended March 31, 2017, as compared to the same period in 2016.
Income Tax Expense
The provision for income taxes was $85.0 million for the three months ended March 31, 2017 as compared to $128.4 million for the same period in 2016. The provision for income taxes is based on an estimated effective tax rate for the entire year. The estimated annual effective tax rate is subject to adjustment in subsequent quarterly periods if components used to estimate the effective tax rate are updated or revised. The estimated effective tax rate as of March 31, 2017 and March 31, 2016, was approximately 32 percent and approximately 35 percent, respectively. Our 2017 estimated effective tax rate decreased compared to 2016 primarily due to a decrease in non-deductible share-based compensation expense, and the impact of ASU 2016-09 adoption requiring windfall excess tax benefits to be recognized in income tax expense.
Non-GAAP Earnings
Non-GAAP earnings is defined as net income, adjusted for: (1) share-based compensation expense (benefit), net (including expenses relating to stock options, share tracking awards, restricted stock units and our employee stock purchase plan); (2) extraordinary, non-recurring and unusual items; and (3) tax impact on non-GAAP earnings adjustments. Starting in the first quarter of 2017, we will no longer adjust our non-GAAP results for interest expense, depreciation and amortization. We believe these changes will provide a better view of the company’s regular and on-going operations. Prior year amounts will reflect this change for comparability purposes.
A reconciliation of net income to non-GAAP earnings is presented below (in millions, except per share data):
Three Months Ended
March 31,
2017
2016
Net income, as reported
$
178.6
$
235.5
Adjusted for:
Share-based compensation benefit, net
(19.1)
(144.6)
Tax expense(1)
6.2
51.0
Non-GAAP earnings
$
165.7
$
141.9
Non-GAAP earnings per share:
Basic
$
3.72
$
3.13
Diluted
$
3.61
$
2.91
Weighted average number of common shares outstanding:
Basic
44.5
45.4
Diluted
45.9
48.7
(1) Represents the total tax impact of the quarterly non-GAAP earnings adjustments based on our actual quarterly effective income tax rates of approximately 32 percent and approximately 35 percent as of March 31, 2017 and 2016, respectively.