What happened
Shares of United Therapeutics (UTHR -0.44%) fell more than 18% last month, according to data provided by S&P Global Market Intelligence. The specialty pharmaceutical company reported first-quarter 2019 operating results that showed the business faces persistent headwinds. Revenue declined roughly 7% year over year, while an $800 million up-front payment to Arena Pharmaceuticals for a license for ralinepag torpedoed profits.
The recent financial results come after a phase 3 failure for esuberaprost was announced in early April. The string of bad news has whacked shares by 30% since the end of March. That said, the market might be doling out a little too much punishment for the lung disease specialist. United Therapeutics exited March with $2 billion in cash on hand, but the profitable business boasts a market cap of just $3.6 billion.
Image source: Getty Images.
So what
The central storyline for United Therapeutics in recent years has been the need to develop and launch new drug products so the aging portfolio can head off a wave of generic competition. That threat showed up in Q1.
A $77.6 million decline in Adcirca revenue offset double-digit percentage increases for the portfolio's other four drug franchises. The decline was the result of encroaching generic competition that began in August 2018. However, there was a silver lining: United Therapeutics saved $32.8 million in royalty payments for sales of the drug, which led to sharply improved gross margin.
|
Metric |
Q1 2019 |
Q1 2018 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$362.6 million |
$389.2 million |
(7%) |
|
Cost of product revenue |
$29.1 million |
$53.2 million |
(45%) |
|
Gross margin |
92% |
86.3% |
630 basis points |
|
R&D expenses |
$893.8 million |
$58.2 million |
N/A |
|
Net income |
($494.6 million) |
$244.5 million |
N/A |
Data source: SEC filing.
Investors who peek over the horizon will see a promising diversity of R&D investments. In addition to ralinepag, United Therapeutics has multiple late-stage clinical trials seeking to expand the use of current marketed drug products in pulmonary hypertension (PH) and pulmonary arterial hypertension (PAH), as well as multiple new drug products and biologic drugs in development to treat those and other lung diseases. It also continues to make progress on its organ manufacturing platform.
Many patients with severe lung diseases require lung transplants, but a shortage of available donors and the complexity of salvaging lungs from donors complicates the matter. United Therapeutics has funded and co-developed processes and devices to make more donor lungs available to more patients (a promising approach just earned marketing clearance in the U.S.), and is developing humanized pig organs for transplantation, 3D-printed organ scaffolds, and regenerative medicine approaches to combat the problem.
Now what
Investors can't deny that United Therapeutics faces headwinds at the moment, but they also can't dismiss robust efforts to significantly diversify future revenue sources. Not every R&D program will succeed, but it's equally unlikely that all the company's efforts will fail. Therefore, opportunistic investors might want to give this company a closer look.
