Why United Therapeutics Corporation Stock Skyrocketed

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of United Therapeutics (NASDAQ: UTHR  ) , a biopharmaceutical company that develops products to treat chronic and life-threatening diseases primarily in the cardiopulmonary field, surged 29% today after receiving a favorable legal decision regarding its lead drug, Remodulin.

So what: According to United Therapeutics' late afternoon press release, the U.S. District Court for the District of New Jersey issued a ruling in favor of United Therapeutics in its patent case against Novartis' (NYSE: NVS  ) generic drug subsidiary Sandoz International. Sandoz had been planning to bring a generic version of Remodulin, a drug that treats breathing problems in patients with pulmonary arterial hypertension, to market, as noted by its abbreviated new drug application filing in 2011. However, those plans have changed with this ruling that upheld United Therapeutics' exclusivity claims to Remodulin in the U.S. until October 2017.

Now what: The scope of the move higher makes sense from the standpoint of United Therapeutics' shareholders because Remodulin made up $138.2 million, or 43%, of its $322.8 million in sales during the second quarter. This was up 11.1% from the year-ago period. In other words, an unfavorable ruling could have removed about a third of United Therapeutics' revenue within a year, since generics often garner about 80% to 90% of eventual sales from innovator drugs.

The good news here is United Therapeutics is free and clear to continue selling its high-margin lead drug for another three years. On the flipside, investors, or those on the outside looking in and thinking about investing in United Therapeutics, should also realize that its largest drug is going to face generic competition in just over three years. Put plainly, if investors don't have confidence in United Therapeutics' pipeline or other existing products to make up for the eventual loss of exclusivity on Remodulin, then chasing the stock higher after today may not be the best idea.

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