United Therapeutics Corporation
Today I want to look closer at Magic Recipe Spell stock United Therapeutics (UTHR).
United Therapeutics is a specialty pharmaceutical company, focusing on very small patient indications that allow it to win orphan drug designation, which protects its products for long periods of time and allows premium pricing. Specifically, United focuses on drugs that extend the lifespan for suffers of pulmonary arterial hypertension (PAH), a dangerous disease of high lung blood pressure that, sadly, is fatal to most sufferers.
United's drugs are designed to expand the lifespan of PAH sufferers, and allow them to be more active than they would be able to achieve otherwise. Its oldest and largest product, Remodulin (35% of sales), is administered by IV or injection. Tyvaso (30%) is an inhaled form of treprostinil (the active ingredient in Remodulin). Orenitram (9%) is the first orally ingested form of treprostinil. Adcirca (23%) is an early-stage PAH treatment based on a different active ingredient, tadalafil.
What's The Growth Plan?
Despite more than tripling revenues over the past 6 years, United continues to deliver solid growth metrics. In the most recent quarter, sales grew 17% year-over-year. Both of United's legacy products, Remodulin and Tyvaso, continued to show modest growth at 3% and 4%, respectively.
But the real story is in its newer, orally-ingested formulations. Adcirca continues to show remarkable growth, expanding sales 25% last quarter, particularly impressive when you consider that this drug is just slightly different than Eli Lilly's Cialis. But the real star for United is Orenitram, which was launched in 2014.
Orenitram is the first oral version of treprostinil, representing a much more palatable and simpler dosing method than either Remodulin or Tyvaso. So it makes sense that some of Orenitram's growth (85% year-over-year last quarter) is coming from cannibalization of those 2 products. But what is very interesting is that 70% of new Orenitram subscribers are new to therapy. This indicates that UTHR is expanding its patient base - a great thing for the company (more revenues without cannibalization), but also a great thing for its patients as more PAH sufferers are given a chance at better quality-of-life.
Orenitram appears to have a very attractive growth ramp. Management has stated its expectations of adding 1,000 new patients a year to reach an ultimate goal of 5,000 patients, at which point Orenitram would be nearly a $1 billion per year product, from a current run rate of about $150 million. To put this into perspective, UTHR currently is at about $1.5 billion in revenues. Orenitram is a huge opportunity.
Just this year, United launched its first product outside of PAH, Unituxin for high-risk neuroblastoma, a form of cancer most prevalent in young children and notoriously difficult to treat. Unituxin is another impressive achievement for United, the first approved therapy for the condition and another to achieve orphan designation from the FDA. In its first quarter of sales, Unituxin produced $5 million in revenue, followed by $16 million in its second quarter. Analysts are forecasting a market potential of $150 million per year.
Other Things to Like
United has great growth prospects for a value stock with a 13% earnings yield, but there are numerous other reasons to like the stock.
The first thing is financial health. United carries a billion in cash on the balance sheet and has virtually no debt. A sale of its priority review voucher to Abbvie netted $350 million last fall. The firm generates huge free cash flows, currently at a rate exceeding... $350 million. UTHR is financially rock solid.
The second is a recently announced $500 million share buyback program, the firm's first. This should reduce outstanding shares by about 7% (before dilution).
United also has a stellar management team. Founder Martine Rothblatt still sits as Co-CEO and chairman (chairperson). She maintains a large 8% ownership stake in her company. Roger Jeffs was elevated to co-CEO a little over a year ago after service as President and COO for 14 years. He has extensive experience and at 53, should have many more years leading the company. The track record here is impeccable.
Finally, UTHR's valuation is attractive. At around $122, the earnings yield is over 13% and the P/E ratio is under 10. Clearly this is a quality company at a very reasonable price.
Risks and Concerns
No investment is without risks, and United Therapeutics has a few that investors should be aware of.
Perhaps most acutely, new competition entered the market in January in the form of Actelion's Uptravi, a second oral PAH drug. Uptravi will compete most directly with Orenitram. If the drug is successful, Orenitram's growth trajectory could be substantially impaired.
Secondly, United's largest product, Remodulin, has generic competition coming in summer 2018 after a recent settlement with Sandoz. The market will need to see solid growth from the company's other drugs - and successful new products - to give it peace that UTHR can continue to grow in spite of this.
Third, the company's pipeline is a bit of a question mark. We know about a Remodulin implantable pump delivery venture with Medtronic (MDT) that would extend that drug's sales horizon, but this is at least 12-14 months away. UTHR is also investigating manufactured lung transplants as a longer-term treatment for PAH, but again this is many years out and has a questionable future. Beyond those, UTHR tends to keep its product candidates close to the vest.
If there is one thing I've learned through the past 8+ years of writing for MagicDiligence, its that probably the most reliable investment strategy is to "buy management". If that is true, UTHR is a great option, as management's track record is phenomenal. Consider this: in the past 10 years, UTHR has grown its revenues by almost 1,200%, and its operating profits by nearly 1,600%! It is hard to do much better than that.
There are some risks here, Uptravi perhaps the most acute. But with UTHR's historical dominance of the PAH market, doctor's familiarity and comfort with its treatments, and tight focus on the clinical space, I really think Uptravi is going to have an uphill battle taking market share. At the same time, given management's track record of success, I feel UTHR will be able to successfully line extend its current products and enter new orphan markets successfully going forward.
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