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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended September 30, 2017

 

OR

 

o              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the transition period from                to                

 

Commission file number 0-26301

 

United Therapeutics Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

52-1984749

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

1040 Spring Street, Silver Spring, MD

 

20910

(Address of Principal Executive Offices)

 

(Zip Code)

 

(301) 608-9292

(Registrant’s Telephone Number, Including Area Code)

 

 

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,  smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(do not check if a smaller reporting company)

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of shares outstanding of the issuer’s common stock, par value $.01 per share, as of October 18, 2017 was 43,211,053.

 

 

 



Table of Contents

 

INDEX

 

 

 

Page

 

 

 

Part I.

FINANCIAL INFORMATION (UNAUDITED)

3

 

 

 

Item 1.

Consolidated Financial Statements

3

 

 

 

 

Consolidated Balance Sheets

3

 

 

 

 

Consolidated Statements of Operations

4

 

 

 

 

Consolidated Statements of Comprehensive Income

5

 

 

 

 

Consolidated Statements of Cash Flows

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

Part II.

OTHER INFORMATION

34

 

 

 

Item 1.

Legal Proceedings

34

 

 

 

Item 1A.

Risk Factors

34

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

 

 

 

Item 6.

Exhibits

48

 

 

 

SIGNATURES

 

49

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  CONSOLIDATED FINANCIAL STATEMENTS

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

 

 

September 30,
2017

 

December 31,
2016

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

1,067.5

 

$

1,023.0

 

Marketable investments

 

143.2

 

27.8

 

Accounts receivable, no allowance for 2017 and 2016

 

251.8

 

214.5

 

Inventories, net

 

114.4

 

100.0

 

Other current assets

 

62.3

 

59.5

 

Total current assets

 

1,639.2

 

1,424.8

 

Marketable investments

 

338.5

 

2.3

 

Goodwill and other intangible assets, net

 

45.7

 

33.8

 

Property, plant and equipment, net

 

521.7

 

489.3

 

Deferred tax assets, net

 

177.9

 

178.3

 

Other non-current assets

 

213.0

 

197.1

 

Total assets

 

$

2,936.0

 

$

2,325.6

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

143.3

 

$

104.2

 

Line of credit

 

250.0

 

 

Share tracking awards plan

 

145.1

 

194.8

 

Other current liabilities

 

251.0

 

33.5

 

Total current liabilities

 

789.4

 

332.5

 

Non-current liabilities

 

57.5

 

130.9

 

Total liabilities

 

846.9

 

463.4

 

Commitments and contingencies

 

 

 

 

 

Temporary equity

 

19.2

 

10.9

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, par value $.01, 10,000,000 shares authorized, no shares issued

 

 

 

Series A junior participating preferred stock, par value $.01, 100,000 shares authorized, no shares issued

 

 

 

Common stock, par value $.01, 245,000,000 shares authorized, 69,825,916 and 69,340,985 shares issued, and 43,206,700 and 42,965,856 shares outstanding at September 30, 2017 and December 31, 2016, respectively

 

0.7

 

0.7

 

Additional paid-in capital

 

1,838.6

 

1,813.5

 

Accumulated other comprehensive loss

 

(16.8

)

(16.8

)

Treasury stock, 26,619,216 and 26,375,129 shares at September 30, 2017 and December 31, 2016, respectively

 

(2,579.2

)

(2,379.6

)

Retained earnings

 

2,826.6

 

2,433.5

 

Total stockholders’ equity

 

2,069.9

 

1,851.3

 

Total liabilities and stockholders’ equity

 

$

2,936.0

 

$

2,325.6

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(Unaudited)

 

(Unaudited)

 

Revenues:

 

 

 

 

 

 

 

 

 

Net product sales

 

$

445.5

 

$

408.2

 

$

1,260.6

 

$

1,189.8

 

Total revenues

 

445.5

 

408.2

 

1,260.6

 

1,189.8

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of product sales

 

19.5

 

23.6

 

52.7

 

44.3

 

Research and development

 

55.0

 

45.9

 

151.0

 

80.7

 

Selling, general and administrative

 

47.2

 

100.1

 

171.0

 

177.3

 

Estimated loss contingency

 

 

 

210.0

 

 

Total operating expenses

 

121.7

 

169.6

 

584.7

 

302.3

 

Operating income

 

323.8

 

238.6

 

675.9

 

887.5

 

Other (expense) income:

 

 

 

 

 

 

 

 

 

Interest expense

 

(3.3

)

(0.5

)

(5.5

)

(1.7

)

Other, net

 

3.3

 

1.0

 

7.7

 

2.9

 

Impairment of cost method investment

 

(3.1

)

 

(49.6

)

 

Total other (expense) income, net

 

(3.1

)

0.5

 

(47.4

)

1.2

 

Income before income taxes

 

320.7

 

239.1

 

628.5

 

888.7

 

Income tax expense

 

(44.4

)

(77.3

)

(229.6

)

(285.3

)

Net income

 

$

276.3

 

$

161.8

 

$

398.9

 

$

603.4

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

6.37

 

$

3.75

 

$

9.00

 

$

13.62

 

Diluted

 

$

6.27

 

$

3.50

 

$

8.83

 

$

12.76

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

43.4

 

43.2

 

44.3

 

44.3

 

Diluted

 

44.1

 

46.2

 

45.2

 

47.3

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

 

(Unaudited)

 

(Unaudited)

 

Net income

 

$

276.3

 

$

161.8

 

$

398.9

 

$

603.4

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Foreign currency translation (losses) gain

 

 

(1.0

)

0.2

 

(2.8

)

Defined benefit pension plan:

 

 

 

 

 

 

 

 

 

Actuarial (losses) gain arising during period, net of tax

 

 

(1.2

)

(0.1

)

5.9

 

Amortization of actuarial gain and prior service cost included in net periodic pension cost, net of tax

 

0.1

 

0.1

 

0.4

 

0.5

 

Total defined benefit pension plan, net of tax

 

0.1

 

(1.1

)

0.3

 

6.4

 

Unrealized loss on available-for-sale securities

 

(0.3

)

 

(0.5

)

 

Other comprehensive (losses) gain, net of tax

 

(0.2

)

(2.1

)

 

3.6

 

Comprehensive income

 

$

276.1

 

$

159.7

 

$

398.9

 

$

607.0

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

 

 

Nine Months Ended
September 30,

 

 

 

2017

 

2016

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

398.9

 

$

603.4

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

23.3

 

23.8

 

Share-based compensation benefit

 

(45.0

)

(93.2

)

Impairment of cost method investments

 

49.6

 

 

Estimated loss contingency

 

210.9

 

 

Other

 

(9.2

)

2.5

 

Excess tax benefits from share-based compensation

 

 

(4.6

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(37.3

)

(31.7

)

Inventories

 

(17.0

)

(12.9

)

Accounts payable and accrued expenses

 

37.9

 

13.9

 

Other assets and liabilities

 

(52.1

)

(21.0

)

Net cash provided by operating activities

 

560.0

 

480.2

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant and equipment

 

(58.5

)

(23.3

)

Proceeds from sale of property, plant and equipment

 

8.3

 

 

Purchases of held-to-maturity and other investments

 

(51.8

)

(0.8

)

Maturities of held-to-maturity investments

 

52.6

 

78.8

 

Purchases of available-for-sale investments

 

(452.6

)

 

Purchase of investments held at cost

 

(55.3

)

(7.6

)

Purchase of investments under the equity method

 

 

(2.1

)

Consolidation of variable interest entity

 

0.1

 

 

Intangible assets acquired

 

 

(5.2

)

Net cash (used in) provided by investing activities

 

(557.2

)

39.8

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from line of credit

 

250.0

 

 

Principal payments of debt

 

 

(8.8

)

Payments of debt issuance costs

 

(0.7

)

(6.8

)

Payments to repurchase common stock

 

(250.0

)

(395.5

)

Proceeds from the exercise of stock options

 

38.2

 

6.2

 

Issuance of stock under employee stock purchase plan

 

4.0

 

4.3

 

Excess tax benefits from share-based compensation

 

 

4.6

 

Net cash provided by (used in) financing activities

 

41.5

 

(396.0

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

0.2

 

(2.8

)

Net increase in cash and cash equivalents

 

44.5

 

121.2

 

Cash and cash equivalents, beginning of period

 

1,023.0

 

831.8

 

Cash and cash equivalents, end of period

 

$

1,067.5

 

$

953.0

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

3.8

 

$

0.1

 

Cash paid for income taxes

 

$

250.6

 

$

283.7

 

Non-cash investing and financing activities:

 

 

 

 

 

Non-cash additions to property, plant and equipment

 

$

7.7

 

$

3.2

 

Issuance of common stock upon conversion of convertible notes

 

$

 

$

7.5

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

UNITED THERAPEUTICS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017

(UNAUDITED)

 

1.     Organization and Business Description

 

United Therapeutics Corporation is a biotechnology company focused on the development and commercialization of innovative products to address the unmet medical needs of patients with chronic and life-threatening conditions.

 

We have approval from the U.S. Food and Drug Administration (FDA) to market the following therapies: Remodulin® (treprostinil) Injection (Remodulin), Tyvaso® (treprostinil) Inhalation Solution (Tyvaso), Adcirca® (tadalafil) Tablets (Adcirca), Orenitram® (treprostinil) Extended-Release Tablets (Orenitram) and Unituxin® (dinutuximab) Injection (Unituxin). Our only significant revenues outside the United States are derived from sales of Remodulin in Europe.

 

As used in these notes to the consolidated financial statements, unless the context otherwise requires, the terms “we”, “us”, “our”, and similar terms refer to United Therapeutics Corporation and its consolidated subsidiaries.

 

2.     Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC) for interim financial information. Accordingly, they do not include all of the information required by U.S. generally accepted accounting principles (GAAP) for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the accompanying notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on February 22, 2017.

 

In our management’s opinion, the accompanying consolidated financial statements contain all adjustments, including normal, recurring adjustments, necessary to fairly present our financial position as of September 30, 2017, statements of operations and statements of comprehensive income for the three- and nine-month periods ended September 30, 2017 and September 30, 2016 and statements of cash flows for the nine-month periods ended September 30, 2017 and September 30, 2016. Interim results are not necessarily indicative of results for an entire year.

 

Recently Issued Accounting Standards

 

Accounting Standards Adopted During the Period

 

In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11), which requires that inventory be measured at the lower of cost or net realizable value for entities using first-in, first-out or average cost methods. ASU 2015-11 should be applied prospectively and is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. We adopted this standard on January 1, 2017, with no material impact on our financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (ASU 2016-09), which serves to simplify the accounting for share-based payment transactions. ASU 2016-09 includes guidance on several aspects of the accounting for share-based payments, including the income tax consequences, forfeitures and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. We adopted this standard on January 1, 2017. Upon adoption of ASU 2016-09, we began to recognize excess tax benefits as income tax benefits on our consolidated statements of operations. Previously, we recognized such amounts in additional paid-in capital on our consolidated balance sheets. Additionally, on January 1, 2017, we established an accounting policy election to account for forfeitures of share-based awards when they occur. Upon adoption, we recognized a cumulative-effect adjustment for the removal of the forfeiture estimate with respect to awards that were continuing to vest as of January 1, 2017. The adjustment resulted in a decrease to retained earnings of $5.8 million, which is net of a $3.2 million tax benefit. The guidance also requires that we classify excess tax benefits as an operating activity in our consolidated statements of cash flows, whereas we previously classified such amounts as a financing activity. These amounts are now classified as “other” in our cash flows from operating activities. We have adopted ASU 2016-09 on a prospective basis and, as such, prior periods have not been adjusted, with the exception of the cumulative-effect adjustment to retained earnings for the removal of the forfeiture estimate, which was adopted on a modified retrospective basis. Refer to Note 7—Share Tracking Awards Plans, Note 9—Stockholders’ Equity—Stock Options and Note 10—Income Taxes.

 

7



Table of Contents

 

Accounting Standards Not Yet Adopted

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), and subsequent clarifying guidance. This guidance eliminates transaction-specific and industry-specific revenue recognition guidance under current GAAP and replaces it with a principles-based approach for determining revenue recognition. This guidance requires that companies recognize revenue based on the value of transferred goods or services as they occur in accordance with the contract. In addition, disclosure is required about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The new standard is required to be applied either retrospectively to each prior reporting period presented (“full retrospective approach”) or retrospectively with the cumulative effect of initial application recognized at the date of initial application (“modified retrospective approach”). The new standard is effective for reporting periods beginning after December 15, 2017. We have completed the review of our revenue contract portfolio and do not believe adoption of the new standard will have a material impact on the timing or measurement of our revenue. We are finalizing our revenue accounting policy and other revenue-related documentation and implementing changes to our business processes and controls in preparation for adoption of the new standard. We will adopt the requirements of the new standard in the first quarter of 2018 using the modified retrospective method. The modified retrospective method requires companies to recognize the cumulative effect of initially applying the new standard as an adjustment to opening retained earnings.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which requires equity investments to be measured at fair value through net income. Equity investments that are accounted for under the equity method are not impacted. ASU 2016-01 provides that equity investments without readily determinable fair values can be valued at cost minus impairment using a simplified impairment assessment that utilizes qualitative assessments. ASU 2016-01 requires separate presentation of the financial assets and liabilities by category and form. ASU 2016-01 should be applied prospectively and will be effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. We will adopt the requirements of the new standard in the first quarter of 2018 and do not currently expect adoption to have a material impact on our financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASU 2016-02), which requires that lease assets and lease liabilities be recognized on the balance sheet. ASU 2016-02 also requires additional quantitative and qualitative disclosures that provide the amount, timing, and uncertainty of cash flows relating to lease arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, using a modified retrospective approach. The modified retrospective approach requires retrospective application to the earliest period presented in the respective financial statements, provides certain practical expedients related to leases that commenced prior to the effective date and allows the use of hindsight when evaluating lease options. Early adoption is permitted. We are currently evaluating the effect of adoption on our financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows—Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which reduces existing diversity in the classification of certain cash receipts and cash payments on the statements of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. We will adopt the requirements of the new standard in the first quarter of 2018 and do not currently expect adoption to have a material impact on our financial statements.

 

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes—Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which requires that an entity recognize the income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017 using a modified retrospective approach through a cumulative adjustment to retained earnings as of the beginning of the period of adoption. We will adopt the requirements of the new standard in the first quarter of 2018 and do not currently expect adoption to have a material impact on our financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations-Clarifying the Definition of a Business (ASU 2017-01). This update narrows the definition of a business by providing a screen to determine when an integrated set of assets and activities is not a business. The screen specifies that an integrated set of assets and activities is not a business if substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single asset or a group of similar identifiable assets. ASU 2017-01 should be applied prospectively and is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those fiscal years. We will adopt the requirements of the new standard in the first quarter of 2018 and do not currently expect adoption to have a material impact on our financial statements.

 

8



Table of Contents

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies how an entity is required to test goodwill for impairment. A goodwill impairment will be measured by the amount by which a reporting unit’s carrying value exceeds its fair value, with the amount of impairment not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, and must be adopted on a prospective basis. Early adoption is permitted. We are currently evaluating the effect of adoption on our financial statements.

 

In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (ASU 2017-07), which improves the presentation of net periodic pension cost and net periodic post-retirement benefit cost. For employers that present a measure of operating income in their statement of income, ASU 2017-07 requires employers to include only the service cost component of net periodic pension cost and net periodic post-retirement benefit cost in operating expense along with other employee compensation costs. Under ASU 2017-07, the service cost component of net benefit cost is eligible for capitalization. Additionally, this update further requires other components of net benefit cost to be included in non-operating expenses. ASU 2017-07 is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. An entity is to apply the change in income statement presentation retrospectively, and the change in capitalized benefit cost prospectively. We will adopt the requirements of the new standard in the first quarter of 2018 and do not currently expect adoption to have a material impact on our financial statements.

 

3.     Investments

 

Available-for-Sale Investments

 

Marketable investments classified as available-for-sale consisted of the following (in millions):

 

As of September 30, 2017

 

Amortized
Cost

 

Gross
Unrealized
Losses

 

Fair
Value

 

U.S. government and agency securities

 

$

481.0

 

$

(0.5

)

$

480.5

 

Total

 

$

481.0

 

$

(0.5

)

$

480.5

 

Reported under the following captions on the consolidated balance sheet:

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

 

 

$

28.1

 

Current marketable investments

 

 

 

 

 

115.5

 

Non-current marketable investments

 

 

 

 

 

336.9

 

Total

 

 

 

 

 

$

480.5

 

 

We had no available-for-sale investments as of December 31, 2016.

 

The following table summarizes the contractual maturities of available-for-sale marketable investments (in millions):

 

 

 

September 30, 2017

 

 

 

Amortized
Cost

 

Fair
Value

 

Due in less than one year

 

$

143.7

 

$

143.6

 

Due in one to two years

 

252.1

 

251.8

 

Due in three to five years

 

85.2

 

85.1

 

Total

 

$

481.0

 

$

480.5

 

 

Held-to-Maturity and Other Investments

 

Our current and long-term marketable investments included $29.3 million and $30.1 million of investments classified as held-to-maturity as of September 30, 2017 and December 31, 2016, respectively. Marketable investments classified as held-to-maturity are comprised of government-sponsored enterprises and corporate notes and bonds. We do not intend to sell these securities, nor is it more likely than not that we will be required to sell them prior to the recovery of their amortized cost basis. Furthermore, we do not believe that these securities expose us to undue market risk or counterparty credit risk. As such, we do not consider these securities to be other than temporarily impaired.

 

Investments Held at Cost

 

As of September 30, 2017, we maintain non-controlling equity investments in privately-held companies of approximately $178.9 million in the aggregate. These investments are initially held at cost because we do not have the ability to exercise

 

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significant influence over these companies and their fair values are not readily determinable. During the three- and nine-month periods ended September 30, 2017, we made payments of $30.2 million and $55.3 million, respectively, for investments held at cost. We include our investments held at cost within other non-current assets on our consolidated balance sheets. These investments are subject to a periodic impairment review and if they are deemed to be other-than-temporarily impaired, the investment is measured and recorded at fair value. During the three-and nine-month periods ended September 30, 2017, we recorded $3.1 million and $49.6 million, respectively, of impairment charges related to our cost method investments in privately-held companies.

 

Variable Interest Entity

 

In April 2017, we made a $7.5 million minority investment in a privately-held company. In addition to our investment, we entered into an exclusive license, development and commercialization agreement (the License Agreement) with this company. The License Agreement entitles us to certain control rights that require us to consolidate the balance sheet and results of operations of this company. The control rights relate to additional research and development funding that we may provide to this company over a period of six years. We are also entitled to representation on a joint development committee that approves the company’s use of funding provided by us. In April 2017, we provided $5.2 million of financial support to the company. We have the right, at any time and for any reason, to cease our funding of this company’s activities.

 

As of September 30, 2017, our consolidated balance sheet included $9.6 million of cash maintained by this company that can only be used to settle its obligations. Additionally, our consolidated balance sheets included an $8.8 million in-process research and development intangible asset, $3.4 million of goodwill and $8.3 million of preferred stock due to the consolidation of this company. The preferred stock is recorded in temporary equity on our consolidated balance sheets. During the quarter ended September 30, 2017, this company incurred a net loss of $1.5 million. This company’s creditors have no recourse against our assets and general credit.

 

4.     Fair Value Measurements

 

We account for certain assets and liabilities at fair value and classify these assets within a fair value hierarchy (Level 1, Level 2 or Level 3). Our other current assets and our current liabilities have fair values that approximate their carrying values. Assets and liabilities subject to fair value measurements are as follows (in millions):

 

 

 

As of September 30, 2017

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

641.5

 

$

 

$

 

$

641.5

 

Time deposits(2)

 

 

25.2

 

 

25.2

 

U.S. government and agency securities(2)

 

 

480.5

 

 

480.5

 

Corporate debt securities(2)

 

 

4.1

 

 

4.1

 

Total assets

 

$

641.5

 

$

509.8

 

$

 

$

1,151.3

 

Liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration(3)

 

 

 

10.4

 

10.4

 

Total liabilities

 

$

 

$

 

$

10.4

 

$

10.4

 

 

 

 

As of December 31, 2016

 

 

 

Level 1

 

Level 2

 

Level 3

 

Balance

 

Assets

 

 

 

 

 

 

 

 

 

Money market funds(1)

 

$

534.4

 

$

 

$

 

$

534.4

 

U.S. government and agency securities(2)

 

 

19.3

 

 

19.3

 

Corporate debt securities(2)

 

 

10.8

 

 

10.8

 

Total assets

 

$

534.4

 

$

30.1

 

$

 

$

564.5

 

Liabilities

 

 

 

 

 

 

 

 

 

Contingent consideration(3)

 

 

 

10.4

 

10.4

 

Total liabilities

 

$

 

$

 

$

10.4

 

$

10.4

 

 


(1)       Included in cash and cash equivalents on the accompanying consolidated balance sheets.

 

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(2)       Included in cash equivalents and current and non-current marketable investments on the accompanying consolidated balance sheets. The fair value of these securities is principally measured or corroborated by trade data for identical securities in which related trading activity is not sufficiently frequent to be considered a Level 1 input or comparable securities that are more actively traded.

 

(3)       Included in non-current liabilities on the accompanying consolidated balance sheets. The fair value of contingent consideration has been estimated using probability-weighted discounted cash flow models (DCFs). The DCFs incorporate Level 3 inputs including estimated discount rates that we believe market participants would consider relevant in pricing and the projected timing and amount of cash flows, which are estimated and developed, in part, based on the requirements specific to each acquisition agreement.

 

Fair Value of Financial Instruments

 

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of their short maturities. The fair values of our marketable investments are reported above within the fair value hierarchy. Refer to Note 3—Investments.

 

5.     Inventories

 

Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value and consist of the following, net of reserves (in millions):

 

 

 

September 30,
2017

 

December 31,
2016

 

Raw materials

 

$

27.5

 

$

25.4

 

Work-in-progress

 

24.7

 

24.9

 

Finished goods

 

62.2

 

49.7

 

Total inventories

 

$

114.4

 

$

100.0

 

 

6.     Goodwill and Other Intangible Assets

 

Goodwill and other intangible assets comprise the following (in millions):

 

 

 

As of September 30, 2017

 

As of December 31, 2016

 

 

 

Gross

 

Accumulated
Amortization

 

Net

 

Gross

 

Accumulated
Amortization

 

Net

 

Goodwill

 

$

13.7

 

$

 

$

13.7

 

$

10.3

 

$

 

$

10.3

 

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology, patents and trade names

 

6.5

 

(4.9

)

1.6

 

6.5

 

(4.8

)

1.7

 

In-process research and development

 

30.4

 

 

30.4

 

21.5

 

 

21.5

 

Customer relationships and non-compete agreements

 

4.3

 

(4.3

)

 

4.3

 

(4.0

)

0.3

 

Total

 

$

54.9

 

$

(9.2

)

$

45.7

 

$

42.6

 

$

(8.8

)

$

33.8

 

 

7.     Share Tracking Awards Plans

 

We previously issued awards under the United Therapeutics Corporation Share Tracking Awards Plan, adopted in June 2008 (2008 STAP) and the United Therapeutics Corporation 2011 Share Tracking Awards Plan, adopted in March 2011 (2011 STAP). We refer to the 2008 STAP and the 2011 STAP collectively as the “STAP” and awards outstanding under either of these plans as “STAP awards.” STAP awards convey the right to receive in cash an amount equal to the appreciation of our common stock, which is measured as the increase in the closing price of our common stock between the dates of grant and exercise. STAP awards expire on the tenth anniversary of the grant date and, in most cases, they vest in equal increments on each anniversary of the grant date over a four-year period. Our STAP liability includes vested awards and awards that are expected to vest. We recognize expense for awards that are expected to vest during the vesting period. We discontinued the issuance of STAP awards in June 2015.

 

Our aggregate STAP liability balance was $146.0 million and $268.9 million at September 30, 2017 and December 31, 2016, respectively, of which $0.9 million and $74.1 million, respectively, has been classified as other non-current liabilities on our consolidated balance sheets based on the vesting terms of the underlying STAP awards. The decrease in our STAP liability

 

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classified as non-current liabilities is primarily due to a tranche of STAP awards with a fair value of $60.7 million at September 30, 2017 that is expected to vest within one year, and therefore is now classified as a current liability.

 

Estimating the fair value of STAP awards requires the use of certain inputs that can materially impact the determination of fair value and the amount of compensation expense (benefit) we recognize. Inputs used in estimating fair value include the price of our common stock, the expected volatility of the price of our common stock, the risk-free interest rate, the expected term of STAP awards and the expected dividend yield. We measure the fair value of outstanding STAP awards at the end of each financial reporting period because the awards are settled in cash. As a result of the adoption of ASU 2016-09, we established an accounting policy election to account for forfeitures of share-based awards when they occur. Upon adoption, we recognized a cumulative-effect adjustment for the removal of the forfeiture estimate with respect to awards that were continuing to vest as of January 1, 2017. The adjustment increased our STAP liability by $8.4 million and decreased retained earnings by $5.4 million, net of tax. Refer to Note 2—Basis of Presentation—Recently Issued Accounting Standards.

 

The table below includes the weighted-average assumptions used to measure the fair value of the outstanding STAP awards:

 

 

 

September 30,
2017

 

September 30,
2016

 

Expected volatility

 

32.8

%

35.5

%

Risk-free interest rate

 

1.4

%

0.9

%

Expected term of awards (in years)

 

1.9

 

2.8

 

Expected dividend yield

 

0.0

%

0.0

%

 

The closing price of our common stock was $117.19 and $118.08 on September 30, 2017 and September 30, 2016, respectively. The closing price of our common stock was $143.43 on December 31, 2016.

 

A summary of the activity and status of STAP awards during the nine-month period ended September 30, 2017 is presented below:

 

 

 

Number of
Awards

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term
(in Years)

 

Aggregate
Intrinsic
Value
(in millions)

 

Outstanding at January 1, 2017

 

5,113,838

 

$

91.51

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(741,859

)

70.70

 

 

 

 

 

Forfeited

 

(116,418

)

110.40

 

 

 

 

 

Outstanding at September 30, 2017

 

4,255,561

 

$

94.62

 

5.8

 

$

153.1

 

Exercisable at September 30, 2017

 

2,553,425

 

$

96.99

 

5.7

 

$

86.6

 

Unvested as of September 30, 2017

 

1,702,136

 

$

91.06

 

6.1

 

$

66.5

 

 

Share-based compensation (benefit) expense recognized in connection with STAP awards is as follows (in millions):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Cost of product sales

 

$

(2.1

)

$

3.5

 

$

(4.7

)

$

(8.7

)

Research and development

 

(8.2

)

8.1

 

(16.9

)

(31.6

)

Selling, general and administrative

 

(27.7

)

34.2

 

(55.9

)

(76.2

)

Share-based compensation (benefit) expense before taxes

 

$

(38.0

)

$

45.8

 

$

(77.5

)

$

(116.5

)

Related income tax expense (benefit)

 

13.9

 

(17.1

)

28.4

 

42.6

 

Share-based compensation (benefit) expense, net of taxes

 

$

(24.1

)

$

28.7

 

$

(49.1

)

$

(73.9

)

 

Cash paid to settle STAP awards exercised during the nine-month periods ended September 30, 2017 and September 30, 2016 was $54.1 million and $52.7 million, respectively.

 

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8.              Debt

 

Unsecured Revolving Credit Facility

 

In January 2016, we entered into a credit agreement (the 2016 Credit Agreement) with Wells Fargo Bank, National Association (Wells Fargo), as administrative agent and a swingline lender, and various other lender parties, providing for an unsecured revolving credit facility of up to $1.0 billion. In accordance with the terms of the 2016 Credit Agreement, in January 2017 we extended the maturity date of the 2016 Credit Agreement by one year, to January 2022.

 

At our option, amounts borrowed under the 2016 Credit Agreement bear interest at either the LIBOR rate or a fluctuating base rate, in each case, plus an applicable margin determined on a quarterly basis based on our consolidated ratio of total indebtedness to EBITDA (as calculated in accordance with the 2016 Credit Agreement).

 

On June 1, 2017, we borrowed $250.0 million under this facility and used the funds to initiate an accelerated share repurchase program. Refer to Note 9—Stockholders’ Equity—Share Repurchase. Although our credit facility matures in 2022, we classified the debt as a current liability on our consolidated balance sheet as we intend to repay the borrowed amount within one year. We elected to have interest on this draw calculated at LIBOR plus an applicable margin. During the three- and nine-month periods ended September 30, 2017, we recorded $2.1 and $3.7 million, respectively, of interest expense related to the credit facility.

 

The 2016 Credit Agreement contains customary events of default and customary affirmative and negative covenants. As of September 30, 2017, we were in compliance with such covenants. Lung Biotechnology PBC is our only subsidiary that guarantees our obligations under the 2016 Credit Agreement though, from time to time, one or more of our other subsidiaries may be required to guarantee such obligations.

 

Convertible Notes and Warrant Transactions

 

In October 2011, we issued $250.0 million in aggregate principal value 1.0 percent Convertible Senior Notes due September 15, 2016 (Convertible Notes). Upon maturity of the Convertible Notes in September 2016, we fulfilled all remaining settlement and repayment obligations.

 

In connection with the issuance of the Convertible Notes, we sold to Deutsche Bank AG London (DB London) warrants to acquire up to approximately 5.2 million shares of our common stock at a strike price of $67.56 per share. The warrants expired incrementally on a series of expiration dates during December 2016 and January 2017. The warrants were settled on a net-share basis. As the price of our common stock exceeded the strike price of the warrants on the series of related incremental expiration dates, we delivered 2.8 million shares of common stock previously held as treasury stock to DB London, including 1.7 million shares that were delivered during the first quarter of 2017.

 

9.              Stockholders’ Equity

 

Earnings Per Common Share

 

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period, adjusted for the potential dilutive effect of other securities if such securities were converted or exercised. The components of basic and diluted earnings per common share comprised the following (in millions, except per share amounts):

 

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Table of Contents

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income

 

$

276.3

 

$

161.8

 

$

398.9

 

$

603.4

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares — basic

 

43.4

 

43.2

 

44.3

 

44.3

 

Effect of dilutive securities(1):

 

 

 

 

 

 

 

 

 

Warrants

 

 

2.3

 

0.1

 

2.3

 

Stock options, restricted stock units and employee stock purchase plan

 

0.7

 

0.7

 

0.8

 

0.7

 

Weighted average shares — diluted(2)

 

44.1

 

46.2

 

45.2

 

47.3

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

6.37

 

$

3.75

 

$

9.00

 

$

13.62

 

Diluted

 

$

6.27

 

$

3.50

 

$

8.83

 

$

12.76

 

 

 

 

 

 

 

 

 

 

 

Stock options, convertible notes and warrants excluded from calculation(2)

 

3.7

 

5.3

 

3.1

 

5.3

 

 


(1)                     Calculated using the treasury stock method.

 

(2)                     Certain stock options and warrants have been excluded from the computation of diluted earnings per share because their impact would be anti-dilutive for the three- and nine-month periods ended September 30, 2017 and September 30, 2016. Additionally, certain convertible notes were excluded for the three- and nine-month periods ended September 30, 2016. Under our convertible note hedge agreement, we were entitled to receive shares required to be issued to investors upon conversion of our Convertible Notes. Since related shares used to compute dilutive earnings per share would be anti-dilutive, they have been excluded from the calculation above.

 

Equity Incentive Plans

 

As of September 30, 2017, we have two shareholder-approved equity incentive plans: the United Therapeutics Corporation Amended and Restated Equity Incentive Plan (the 1999 Plan) and the United Therapeutics Corporation 2015 Stock Incentive Plan (the 2015 Plan). The 2015 Plan was approved by our shareholders in June 2015 and provides for the issuance of up to 6,150,000 shares of our common stock pursuant to awards granted under the 2015 Plan. The 2015 Plan is a broad-based stock incentive plan enabling us to grant stock options and other forms of equity compensation to our employees and non-employee directors. As a result of the approval of the 2015 Plan, no further awards will be granted under the 1999 Plan. During the nine-month periods ended September 30, 2017 and September 30, 2016, we granted 2.0 million and 1.6 million stock options under the 2015 Plan, respectively.

 

Stock Options

 

We estimate the fair value of stock options using the Black-Scholes-Merton valuation model, which requires us to make certain assumptions that can materially impact the estimation of fair value and related compensation expense. The assumptions used to estimate fair value include the price of our common stock, the expected volatility of our common stock, the risk-free interest rate, the expected term of stock option awards and the expected dividend yield. As a result of the adoption of ASU 2016-09, we established an accounting policy election to account for forfeitures of share-based awards when they occur. Upon adoption, we recognized a cumulative-effect adjustment for the removal of the forfeiture estimate with respect to awards that were continuing to vest as of January 1, 2017. The adjustment decreased retained earnings by $0.4 million, net of tax. Refer to Note 2—Basis of Presentation—Recently Issued Accounting Standards.

 

In March 2017, we began issuing stock options with performance conditions under the 2015 Plan to certain executives. The awards have vesting conditions tied to the achievement of specified performance conditions. The performance conditions have target performance levels that span from one to three years. Upon the conclusion of the performance period, the performance level achieved will be measured and the ultimate number of shares that may vest will be determined. Share-based compensation expense for these awards is recorded ratably over their vesting period, depending on the specific terms of the award and achievement of the specified performance conditions. During 2017, we have granted 0.9 million stock options with performance vesting conditions with a total grant date fair value of $53.9 million based on achievement of target performance levels.

 

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During the three-and nine-month periods ended September 30, 2017, we recorded $5.7 million and $11.2 million, respectively, of share-based compensation expense related to these awards.

 

The table below includes the weighted-average assumptions used to measure the fair value of all stock options (including both time-vesting and performance-vesting awards) granted during the nine-month periods ended September 30, 2017 and September 30, 2016:

 

 

 

September 30,
2017

 

September 30,
2016

 

Expected volatility

 

35.7

%

34.8

%

Risk-free interest rate

 

2.2

%

1.6

%

Expected term of awards (in years)

 

6.1

 

5.8

 

Expected dividend yield

 

0.0

%

0.0

%

 

A summary of the activity and status of stock options under our equity incentive plans during the nine-month period ended September 30, 2017 is presented below:

 

 

 

Number of
Options

 

Weighted-
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term (Years)

 

Aggregate
Intrinsic
Value
(in millions)

 

Outstanding at January 1, 2017

 

4,459,291

 

$

104.97

 

 

 

 

 

Granted

 

1,958,843

 

145.72

 

 

 

 

 

Exercised

 

(428,541

)

89.17

 

 

 

 

 

Forfeited/canceled

 

(64,586

)

132.86

 

 

 

 

 

Outstanding at September 30, 2017

 

5,925,007

 

$

119.28

 

7.3

 

$

64.4

 

Exercisable at September 30, 2017

 

3,114,975

 

$

102.70

 

5.7

 

$

63.8

 

Unvested as of September 30, 2017

 

2,810,032

 

$

137.66

 

9.1

 

$

0.6

 

 

The weighted average fair value of a stock option granted during each of the nine-month periods ended September 30, 2017 and September 30, 2016, was $56.07 and $42.55, respectively. These stock options have an aggregate grant date fair value of $109.8 million and $69.2 million, respectively. The total fair value of stock options that vested during the nine-month periods ended September 30, 2017 and September 30, 2016 was $13.1 million and $19.9 million, respectively.

 

Stock option exercise data is summarized below (dollars in millions):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Number of options exercised

 

40,565

 

42,443

 

428,541

 

196,984

 

Cash received

 

$

1.6

 

$

1.2

 

$

38.2

 

$

6.2

 

Total intrinsic value of options exercised

 

$

3.5

 

$

3.9

 

$

27.0

 

$

17.3

 

 

Total share-based compensation expense relating to stock options is as follows (in millions):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2017

 

2016

 

2017

 

2016

 

Cost of product sales

 

$

0.4

 

$

0.1

 

$

0.9

 

$

0.3

 

Research and development

 

1.0

 

0.5

 

2.6

 

1.0

 

Selling, general and administrative

 

11.7

 

2.7

 

26.4

 

20.4

 

Share-based compensation expense before taxes

 

13.1

 

3.3

 

29.9

 

21.7

 

Related income tax benefit

 

(4.8

)

(1.1

)

(11.0

)

(7.9

)

Share-based compensation expense, net of taxes

 

$

8.3

 

$

2.2

 

$

18.9

 

$

13.8

 

 

As of September 30, 2017, unrecognized compensation cost was $114.5 million. Unvested outstanding stock options as of September 30, 2017 had a weighted average remaining vesting period of 2.6 years.

 

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Restricted Stock Units

 

In June 2016, we began issuing restricted stock units under the 2015 Plan to our non-employee directors. In October 2017, we also began issuing restricted stock units to employees. Over time, we expect to increase the percentage of our equity awards made to employees in the form of restricted stock units, instead of stock options. Each restricted stock unit entitles the recipient to receive one share of our common stock upon vesting. We measure the fair value of restricted stock units using the stock price on the date of grant. Share-based compensation expense for the restricted stock units is recorded ratably over their vesting period. During the nine months ended September 30, 2017, we granted 17,820 restricted stock units under the 2015 Plan with a weighted average grant date fair value of $132.30. These restricted stock units had an aggregate grant date fair value of $2.4 million. We recorded $1.6 million and $0.6 million in share-based compensation expense related to restricted stock units for the nine-month periods ended September 30, 2017 and September 30, 2016, respectively. The share-based compensation expense related to restricted stock units granted to non-employee directors is reflected in selling, general and administrative expense on our statements of operations.

 

As of September 30, 2017, unrecognized compensation cost related to the grant of restricted stock units was $1.7 million. Unvested outstanding restricted stock units as of September 30, 2017 had a weighted average remaining vesting period of 0.7 years.

 

Share Repurchase

 

In April 2017, our Board of Directors approved a share repurchase program authorizing up to $250.0 million in aggregate repurchases of our common stock. Pursuant to this authorization, in May 2017, we paid $250.0 million to enter into an accelerated share repurchase agreement (ASR) with Citibank, N.A. (Citibank). Pursuant to the terms of the ASR, in June 2017, Citibank delivered to us approximately 1.7 million shares of our common stock, representing the minimum number of shares we were entitled to receive under the ASR. The ASR was originally scheduled to terminate during the fourth quarter of 2017; however, in September 2017, Citibank notified us of its election to accelerate the termination date of the contract to September 8, 2017. Upon termination of the ASR, Citibank delivered to us approximately 0.3 million additional shares of our common stock. The ASR was accounted for as an equity transaction and the shares we repurchased under the ASR were included in treasury stock when the shares were received.

 

10.       Income Taxes

 

Our effective income tax rate (ETR) for the nine months ended September 30, 2017 and September 30, 2016 was 37 percent and 32 percent, respectively. Our 2017 ETR increased compared to 2016 primarily due to the following expenses incurred during the nine months ended September 30, 2017: (1) the nondeductible portion of a $210.0 million loss contingency accrual; and (2) the impairment charges related to two of our investments held at cost that are not currently deductible for tax purposes.

 

During the second quarter of 2017, we recorded a $210.0 million accrual relating to an ongoing investigation by the U.S. Department of Justice. During the second quarter, we did not recognize any tax benefit relating to this accrual, because at the time we did not have sufficient information to indicate it would be tax deductible. During the third quarter of 2017, we received additional information supporting recognition of a tax benefit of $57.0 million related to a portion of this accrual. Refer to Note 12—Litigation.

 

During the nine months ended September 30, 2017, we recorded $49.6 million of impairment charges related to two of our investments held at cost. The impairment charges are not currently deductible for tax purposes, so we recorded a deferred tax asset of $18.3 million. We evaluated potential future sources of income of the appropriate character to determine whether the deferred tax asset was realizable and have not found sufficient sources of capital gains to offset the deferred tax asset. Therefore, the deferred tax asset must be fully reserved with a valuation allowance. The impact of this valuation allowance on our ETR as of September 30, 2017 is 3 percent and the anticipated impact on our ETR for 2017 is 2 percent.

 

We are subject to federal and state taxation in the United States as well as various foreign jurisdictions. We are no longer subject to income tax examinations by the Internal Revenue Service and substantially all other major jurisdictions for tax years prior to 2011.

 

As of both September 30, 2017 and September 30, 2016, our uncertain tax positions were $0.5 million. Unrecognized tax benefits as of both September 30, 2017 and September 30, 2016, included $0.3 million of tax benefits that, if recognized, would impact our ETR. We record interest and penalties related to uncertain tax positions as a component of income tax expense. As of both September 30, 2017 and September 30, 2016, we have not accrued any interest expense related to uncertain tax positions. We are unaware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

 

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As a result of the adoption of ASU 2016-09 in the first quarter of 2017, we established an accounting policy election to account for forfeitures of share-based awards when they occur. Upon adoption, we recognized a cumulative-effect adjustment for the removal of the forfeiture estimate with respect to awards that were continuing to vest as of January 1, 2017. The adjustment resulted in a $3.2 million tax benefit to reduce retained earnings.

 

Additionally, we now recognize excess tax benefits as income tax benefits on our consolidated statements of operations. For the nine months ended  September 30, 2017, we recognized excess tax benefits of $4.4 million, partially offsetting income tax expenses on our consolidated statements of operations. Previously, we recognized such amounts in additional paid-in capital on our consolidated balance sheets. Refer to Note 2—Basis of Presentation—Recently Issued Accounting Standards.

 

11.       Segment Information

 

We currently operate as one operating segment with a focus on the development and commercialization of products to address the unmet needs of patients with chronic and life-threatening conditions. Our Chief Executive Officer, as our chief operating decision maker, manages and allocates resources to the operations of our company on a consolidated basis. This enables our Chief Executive Officer to assess the overall level of resources available and how to best deploy these resources across functions, therapeutic areas, and research and development projects that are in line with our long-term company-wide strategic goals.

 

Net product sales, cost of product sales and gross profit for each of our commercial products were as follows (in millions):

 

 

 

Three Months Ended September 30,

 

2017

 

Remodulin

 

Tyvaso

 

Adcirca

 

Orenitram

 

Unituxin

 

Total

 

Net product sales

 

$

187.3

 

$

88.9

 

$

99.8

 

$

52.5

 

$

17.0

 

$

445.5

 

Cost of product sales

 

4.0

 

2.2

 

5.6

 

3.9

 

3.8

 

19.5

 

Gross profit

 

$

183.3

 

$

86.7

 

$

94.2

 

$

48.6

 

$

13.2

 

$

426.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

$

152.4

 

$

101.8

 

$

96.0

 

$

40.7

 

$

17.3

 

$

408.2

 

Cost of product sales

 

3.7

 

5.8

 

5.5

 

5.2

 

3.4

 

23.6

 

Gross profit

 

$

148.7

 

$

96.0

 

$

90.5

 

$

35.5

 

$

13.9

 

$

384.6

 

 

 

 

Nine Months Ended September 30,

 

2017

 

Remodulin

 

Tyvaso

 

Adcirca

 

Orenitram

 

Unituxin

 

Total

 

Net product sales

 

$

490.8

 

$

280.5

 

$

300.4

 

$

137.8

 

$

51.1

 

$

1,260.6

 

Cost of product sales

 

9.9

 

7.9

 

16.9

 

10.7

 

7.3

 

52.7

 

Gross profit

 

$

480.9

 

$

272.6

 

$

283.5

 

$

127.1

 

$

43.8

 

$

1,207.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Net product sales

 

$

451.1

 

$

311.0

 

$

259.5

 

$

118.9

 

$

49.3

 

$

1,189.8

 

Cost of product sales

 

4.3

 

12.9

 

15.0

 

7.9

 

4.2

 

44.3

 

Gross profit

 

$

446.8

 

$

298.1

 

$

244.5

 

$

111.0

 

$

45.1

 

$

1,145.5

 

 

12.       Litigation

 

Watson Laboratories, Inc.

 

In June 2015, we received a Paragraph IV certification notice letter from Watson Laboratories, Inc. (Watson) indicating that Watson has submitted an abbreviated new drug application (ANDA) to the FDA to market a generic version of Tyvaso. In its notice letter, Watson states that it intends to market a generic version of Tyvaso before the expiration of U.S. Patent Nos. 6,521,212 and 6,756,033, each of which expires in November 2018; and U.S. Patent No. 8,497,393, which expires in December 2028. Watson’s notice letter states that the ANDA contains a Paragraph IV certification alleging that these patents are not valid, not enforceable, and/or will not be infringed by the commercial manufacture, use or sale of the proposed product described in Watson’s ANDA submission. We responded to the Watson notice letter by filing a lawsuit in July 2015 against Watson in the U.S. District Court for the District of New Jersey alleging infringement of U.S. Patent Nos. 6,521,212, 6,756,033, and 8,497,393. Under the Hatch-Waxman Act, the FDA is automatically precluded from approving Watson’s ANDA for up to 30 months from receipt of Watson’s notice letter or until the issuance of a U.S. District Court decision that is adverse to us,

 

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whichever occurs first. In September 2015, Watson filed (1) a motion to dismiss some, but not all, counts of the complaint; (2) its answer to our complaint; and (3) certain counterclaims against us. The District Court granted Watson’s motion to dismiss certain counts of our complaint. In September 2015, we filed our answer to Watson’s counterclaims. In June 2016, Watson sent us a second Paragraph IV certification notice letter addressing two new patents, U.S. Patent Nos. 9,339,507 (the ’507 patent) and 9,358,240 (the ’240 patent), which expire in March and May 2028, respectively. In June 2016, we filed an amended complaint against Watson asserting these two additional patents. In June 2017, Watson filed petitions with the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office for inter partes review (IPR), seeking to invalidate the ’507 patent and ’240 patent. On October 13, 2017, we filed preliminary responses to the petitions, and the PTAB has three months to decide whether to institute IPR proceedings.

 

Trial in the District Court on all of the asserted patents was scheduled to take place in September 2017. The parties, however, asked the District Court to stay the case until 14 days after the PTAB resolves Watson’s IPR petitions either by declining to institute the IPRs or by issuing a final written decision on the merits. The District Court granted the request staying the case, and as such trial will not occur until sometime after the stay is lifted. The stay could be lifted as early as January 2018 if the IPRs are not instituted. If one or both IPRs are instituted, then the stay will not be lifted until there is a final written decision by the PTAB, which we would expect within a year of the IPR(s) being instituted.

 

We intend to vigorously enforce our intellectual property rights relating to Tyvaso.

 

Actavis Laboratories FL, Inc.

 

In February 2016, we received a Paragraph IV certification notice letter (the First Actavis Notice Letter) from Actavis Laboratories FL, Inc. (Actavis) indicating that Actavis has submitted an ANDA to the FDA to market a generic version of the 2.5 mg strength of Orenitram. The First Actavis Notice Letter states that Actavis intends to market a generic version of the 2.5 mg strength of Orenitram before the expiration of the following patents, all of which are listed in the Orange Book:

 

U.S. Patent No.

 

Expiration Date

8,252,839

 

May 2024

9,050,311

 

May 2024

7,544,713

 

July 2024

7,417,070

 

July 2026

8,497,393

 

December 2028

8,747,897

 

October 2029

8,410,169

 

February 2030

8,349,892

 

January 2031

 

The First Actavis Notice Letter states that the ANDA contains a Paragraph IV certification alleging that these patents are not valid, not enforceable, and/or will not be infringed by the commercial manufacture, use or sale of the proposed product described in Actavis’ ANDA submission. We responded to the First Actavis Notice Letter by filing a lawsuit (the First Actavis Action) against Actavis in March 2016 in the U.S. District Court for the District of New Jersey alleging infringement of each of the patents noted above and one additional patent, U.S. Patent No. 9,278,901 (the ’901 patent), which expires in May 2024 and is also now listed in the Orange Book. Under the Hatch-Waxman Act, the FDA is automatically precluded from approving Actavis’ ANDA with respect to the 2.5 mg strength of Orenitram for up to 30 months from receipt of Actavis’ notice letter or until the issuance of a U.S. District Court decision that is adverse to us with respect to all of the eight patents listed in the table above, whichever occurs first. In June 2016, we filed an amended complaint against Actavis, Actavis filed its answer and counterclaims to that amended complaint, and we filed our answer to those counterclaims.

 

In May 2016, we received a second Paragraph IV certification notice letter from Actavis (the Second Actavis Notice Letter) indicating that Actavis has amended its ANDA to include its generic version of the 0.25 mg and 1.0 mg strengths of Orenitram, in addition to the 2.5 mg strength identified in the First Actavis Notice Letter. We responded to the Second Actavis Notice Letter by filing an additional lawsuit against Actavis (the Second Actavis Action) in June 2016 in the U.S. District Court for the District of New Jersey alleging infringement of the same patents asserted in the First Actavis Action. The Second Actavis Action triggered an additional 30-month stay with respect to the 0.25 mg and 1.0 mg strengths. Specifically, the FDA is automatically precluded from approving Actavis’ ANDA with respect to the 0.25 mg and 1.0 mg strengths of Orenitram for up to 30 months from receipt of the Second Actavis Notice Letter or until the issuance of a U.S. District Court decision that is adverse to us with respect to all of the nine patents noted above, whichever occurs first.

 

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We filed a second amended complaint against Actavis in September 2016, to allege infringement of two patents that were not issued and listed in the Orange Book at the time of the First and Second Actavis Notice Letters, but are now listed: U.S. Patent Nos. 9,393,203, which expires in April 2026, and 9,422,223, which expires in May 2024.

 

The Court has consolidated the First Actavis Action and the Second Actavis Action. The parties are currently engaged in discovery, and trial on all patents is scheduled for February 2018.

 

We intend to vigorously enforce our intellectual property rights relating to Orenitram.

 

SteadyMed Ltd.

 

In October 2015, SteadyMed Ltd. (SteadyMed) filed an IPR petition with the PTAB seeking to invalidate U.S. Patent No. 8,497,393 (the ’393 Patent), which expires in December 2028 and covers a method of making treprostinil, the active pharmaceutical ingredient in Remodulin, Tyvaso and Orenitram. The ’393 Patent was also the subject of now-settled litigation with generic companies relating to ANDAs to market generic versions of Remodulin, and remains the subject of our pending litigation with Watson and Actavis, described above. In June 2017, SteadyMed submitted a new drug application (NDA) to FDA seeking approval of a product called Trevyent®, which is a single-use, pre-filled pump intended to deliver a two-day supply of treprostinil subcutaneously using its PatchPump® technology. In August 2017, SteadyMed announced receipt of a refuse-to-file letter from the FDA relating to SteadyMed’s NDA, requesting further information on certain device specifications and requiring performance testing as well as additional design verification and validation testing on the final, to-be-marketed Trevyent product.

 

In March 2017, the PTAB issued a Final Written Decision regarding SteadyMed’s IPR, finding that all claims of the ’393 patent are not patentable. In May 2017, we appealed the PTAB’s decision to the U.S. Court of Appeals for the Federal Circuit. The parties have completed briefing the appeal, and oral argument is scheduled for November 7, 2017.

 

The ’393 patent remains valid and enforceable until appeals have been exhausted. We intend to continue vigorously defending the ’393 patent.

 

Department of Justice Subpoena

 

In May 2016, we received a subpoena from the U.S. Department of Justice (DOJ) requesting documents regarding our support of 501(c)(3) organizations that provide financial assistance to patients. Other companies have received similar inquiries. The DOJ is investigating whether that support may violate the Federal Anti-Kickback Statute and the Federal False Claims Act. Although we believe that we would successfully defend any action the DOJ might bring, we are engaged in settlement negotiations with the DOJ as part of our efforts to resolve the matter. However, we cannot provide assurances that our efforts to reach a settlement with the DOJ will be successful or, if they are, what the timing or terms of any such settlement would be. We expect any such settlement would include a settlement payment to the government, and it may also include non-monetary obligations, such as our entering into a corporate integrity agreement (CIA). We may be required to incur significant future costs to comply with the CIA. If we do not reach a settlement with the DOJ, we may incur material losses in connection with the defense or resolution of any subsequent litigation with the government. During the second quarter of 2017, we recorded a $210.0 million accrual relating to this matter. The accrual was recorded in other current liabilities on our consolidated balance sheets and as an operating expense on our consolidated statements of operations. We are unable to estimate the amount of reasonably possible losses in excess of the amount accrued because resolution of this matter through settlement is subject to a range of complex factors. Any actions taken by the DOJ, including settlement, could result in negative publicity or otherwise harm our reputation, reduce demand for our products and/or reduce coverage of our products, including by federal health care programs such as Medicare and Medicaid and state health care programs. If any or all of these events occur, our business, prospects and stock price could be materially and adversely affected. Because matters such as this are inherently unpredictable, the ultimate outcome of this matter, including the amount of any loss, may differ materially from our estimate.

 

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Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016, and the consolidated financial statements and accompanying notes included in Part I, Item I of this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934 (the Exchange Act) and the Private Securities Litigation Reform Act of 1995, including the statements listed in the section below entitled Part II, Item 1A—Risk Factors. These statements are based on our beliefs and expectations about future outcomes, and are subject to risks and uncertainties that could cause our actual results to differ materially from anticipated results. Factors that could cause or contribute to such differences include those described in Part II, Item 1A—Risk Factors of this Quarterly Report on Form 10-Q; factors described in our Annual Report on Form 10-K for the year ended December 31, 2016, under the section entitled Part I, Item 1A—Risk Factors—Forward-Looking Statements; and factors described in other cautionary statements, cautionary language and risk factors set forth in other filings with the Securities and Exchange Commission (SEC). We undertake no obligation to publicly update these forward-looking statements, whether as a result of new information, future events or otherwise.

 

Overview of Marketed Products

 

We currently market and sell the following commercial products:

 

·                  Remodulin® (treprostinil) Injection (Remodulin). Remodulin, a continuously-infused formulation of the prostacyclin analogue treprostinil, is approved by the U.S. Food and Drug Administration (FDA) for subcutaneous (under the skin) and intravenous (in the vein) administration. Prostacyclin analogues are stable synthetic forms of prostacyclin, an important molecule produced by the body that has powerful effects on blood vessel health and function. Remodulin is indicated to diminish symptoms associated with exercise in patients with World Health Organization (WHO) Group 1 pulmonary arterial hypertension (PAH). Remodulin has also been approved in various countries outside of the United States.

 

·                  Tyvaso® (treprostinil) Inhalation Solution (Tyvaso). Tyvaso, an inhaled formulation of treprostinil, is approved by the FDA to improve exercise ability in PAH patients.

 

·                  Orenitram® (treprostinil) Extended-Release Tablets (Orenitram). Orenitram, a tablet dosage form of treprostinil, is approved by the FDA to improve exercise ability in PAH patients.

 

·                  Adcirca® (tadalafil) Tablets (Adcirca). We acquired exclusive commercialization rights to Adcirca, an oral phosphodiesterase type 5 (PDE-5) inhibitor therapy for PAH, in the United States from Eli Lilly and Company (Lilly). PDE-5 inhibitors inhibit the degradation of cyclic guanosine monophosphate (cyclic GMP) in cells. Cyclic GMP is activated by nitric oxide (NO), a naturally occurring substance in the body that mediates the relaxation of vascular smooth muscle. Adcirca is approved by the FDA to improve exercise ability in PAH patients.

 

·                  Unituxin® (dinutuximab) Injection (Unituxin). In March 2015, the FDA approved Unituxin in combination with granulocyte-macrophage colony-stimulating factor, interleukin-2, and 13-cis-retinoic acid, for the treatment of patients with high-risk neuroblastoma (a rare form of pediatric cancer) who achieve at least a partial response to prior first-line multi-agent, multimodality therapy. Unituxin is a chimeric, monoclonal antibody composed of a combination of mouse and human proteins, that induces antibody-dependent cell-mediated cytotoxicity, a form of cell-mediated immunity whereby the immune system actively targets a cell that has been bound by specific antibodies. We received orphan drug designation for Unituxin from the FDA, conferring exclusivity through March 2022, during which period the FDA may not approve any application to market the same drug for the same indication, except in limited circumstances such as a showing of clinical superiority.

 

Revenues

 

Our net product sales consist entirely of sales of the five commercial products noted above. We have entered into separate, non-exclusive distribution agreements with Accredo Health Group, Inc. (Accredo) and CVS Caremark, Inc. (Caremark) to distribute Remodulin, Tyvaso and Orenitram in the United States, and we have entered into an exclusive distribution agreement with ASD Specialty Healthcare, Inc. (ASD), an affiliate of AmerisourceBergen Corporation, to distribute Unituxin in the United States. We also sell Remodulin and Tyvaso to distributors internationally. We sell Adcirca through Lilly’s pharmaceutical wholesale network. To the extent we have increased the price of any of these products, increases have typically been in the single-digit percentages per year, except for Adcirca, the price of which is set solely by Lilly.

 

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We require our specialty pharmaceutical distributors to maintain reasonable levels of inventory reserves because the interruption of Remodulin, Tyvaso or Orenitram therapy can be life threatening. Our specialty pharmaceutical distributors typically place monthly orders based on current utilization trends and contractual minimum inventory requirements. As a result, sales of Remodulin, Tyvaso and Orenitram can vary depending on the timing and magnitude of these orders and do not precisely reflect changes in patient demand.

 

We recognize revenues net of: (1) estimated rebates and chargebacks; (2) prompt pay discounts; (3) allowances for sales returns; and (4) distributor fees. We derive our provisions for rebates and chargebacks from an analysis of historical levels of rebates for all government drug discount programs and commercial third-party payer contracts, relative to sales of each product. We also consider new information regarding changes in program regulations and guidelines that would impact the amount of the actual rebates and/or our expectations regarding future utilization rates for these programs. We believe that the methodology that we use to estimate our government and other rebates and chargebacks is reasonable and appropriate given the current facts and circumstances. However, actual rebate and chargeback activity may differ significantly from our estimates, and changes in our methodologies for calculating estimated rebates and chargebacks could have a significant impact on net revenues. We provide prompt pay discounts to customers that pay amounts due within a specific time period and base related estimates on observed historical customer payment behavior. Remodulin, Tyvaso, Orenitram and Unituxin are distributed in the United States under separate contracts, which include exchange rights in the event that product is damaged during shipment or expires. The allowance for exchanges for Remodulin, Tyvaso, Orenitram and Unituxin has been negligible and immaterial. Furthermore, we anticipate minimal exchange activity in the future for these products since we typically sell them with a remaining shelf life in excess of one year and our distributors generally carry a thirty- to sixty-day supply at any given time. As a result, we do not record reserves for exchanges of these products at the time of sale. We derive estimates relating to our allowance for returns of Adcirca based on actual return data accumulated since the drug’s launch in 2009. To date, we have not identified any unusual patterns in the volume of prescriptions relative to sales that would warrant reconsideration of our methodology for estimating Adcirca returns. Lastly, we pay our distributors for contractual services rendered and accrue for related fees based on contractual rates applied to the estimated units of service provided by distributors for a given financial reporting period.

 

Generic Competition

 

We settled litigation with Sandoz, Inc. (Sandoz), Teva Pharmaceuticals USA, Inc. (Teva), Par Sterile Products, LLC (Par) and Dr. Reddy’s Laboratories, Inc. (Dr. Reddy’s), relating to their abbreviated new drug applications (ANDAs) seeking FDA approval to market generic versions of Remodulin before the expiration of certain of our U.S. patents. Under the terms of our settlement agreements, Sandoz can market its generic version of Remodulin in the United States beginning in June 2018, and Teva, Par and Dr. Reddy’s can each market their generic versions of Remodulin in the United States beginning in December 2018, although each of these companies may be permitted to enter the market earlier under certain circumstances.

 

We are engaged in litigation with Watson Laboratories, Inc. (Watson), based on its ANDA seeking to market a generic version of Tyvaso before the expiration of certain of our U.S. patents at various dates from November 2018 through December 2028. In addition, Watson has filed petitions for inter partes review (IPR) seeking to invalidate the claims of two of our patents that expire in 2028 and relate to Tyvaso. We also are engaged in litigation with Actavis Laboratories FL, Inc. (Actavis), contesting its ANDA seeking to market a generic version of the 0.25 mg, 1.0 mg and 2.5 mg strengths of Orenitram before the expiration of certain of our U.S. patents at various dates from 2024 through 2031.

 

Finally, SteadyMed Ltd. (SteadyMed) filed an IPR petition seeking to invalidate the claims of one of our patents that expires in December 2028 and relates to treprostinil (U.S. Patent No. 8,497,393, which we refer to as the ’393 patent), which is the active ingredient in Remodulin, Tyvaso and Orenitram. In March 2017, the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office (USPTO) issued a Final Written Decision in this matter, finding that all claims of the ’393 patent are not patentable. In May 2017, we appealed this decision to the U.S. Court of Appeals for the Federal Circuit. The ’393 patent remains valid and enforceable until appeals have been exhausted. We are currently asserting the ’393 patent (along with several other patents) against Watson and Actavis in connection with their efforts to obtain approval to market generic versions of Tyvaso and Orenitram, respectively.

 

In January 2016, SteadyMed announced that the FDA had granted orphan drug designation for Trevyent®, which is a single-use, pre-filled pump intended to deliver a two-day supply of treprostinil subcutaneously using SteadyMed’s PatchPump® technology. In June 2017, SteadyMed submitted a new drug application (NDA) to the FDA seeking approval of Trevyent for the treatment of PAH. In August 2017, SteadyMed announced receipt of a refuse-to-file letter from the FDA, in which FDA refused to accept SteadyMed’s NDA for review, requested further information on certain device specifications and required performance testing and additional design verification and validation testing on the final, to-be-marketed Trevyent product.

 

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We intend to continue vigorously defending the ’393 patent, but even if the ultimate result is unfavorable to us, we have other patents covering subject matters similar to the ’393 patent and with the same expiration date (December 2028). Specifically, in March 2017, the USPTO awarded us two additional patents related to the ’393 patent, U.S. Patent Nos. 9,593,066 and 9,604,901. We prosecuted the applications that resulted in these new patents in parallel with the ’393 patent IPR proceedings and presented claims addressing the invalidity arguments raised by SteadyMed in the IPR and Watson and Actavis in the ongoing litigations. The USPTO allowed the new patent claims with full knowledge of the IPR, the invalidity arguments presented therein, and the invalidity arguments raised by Watson and Actavis in connection with the ’393 patent. Thus, we anticipate that these new patents should be less susceptible to challenge than the ’393 patent. We have listed both of these new patents in the Orange Book for Remodulin, Tyvaso, and Orenitram and may in the future decide to assert these patents against any competitor marketing or seeking approval to market generic versions of Remodulin, Tyvaso, or Orenitram. Following the Final Written Decision in the ’393 patent IPR, SteadyMed asked the PTAB to invalidate the new patents because SteadyMed claimed that the new patents’ claims are patentably indistinct from the ’393 patent claims. The PTAB denied SteadyMed’s request. Thus, SteadyMed must petition the PTAB to request new IPRs if it wishes to attempt to invalidate the newly issued patents.

 

For further details regarding the Watson, Actavis and SteadyMed matters, please see Note 12—Litigation, to our consolidated financial statements.

 

As a result of our settlements with Sandoz, Teva, Par and Dr. Reddy’s, we expect to see generic competition for Remodulin from these companies in the United States beginning in June 2018 (Sandoz) and December 2018 (Teva, Par and Dr. Reddy’s) (or earlier under certain circumstances). The two patents granted in March 2017 will not impact these settlements. This increased competition could reduce our net product sales and profits. In addition, while we intend to vigorously enforce our intellectual property rights relating to our products, there can be no assurance that we will prevail in defending our patent rights, or that additional challenges from other ANDA filers or other challengers will not surface with respect to our products. Our patents could be invalidated, found unenforceable or found not to cover one or more generic forms of Remodulin, Tyvaso or Orenitram. If any ANDA filer were to receive approval to sell a generic version of Remodulin, Tyvaso or Orenitram and/or prevail in any patent litigation, the affected product(s) would become subject to increased competition, which could reduce our net product sales and profits.

 

The U.S. patent for Adcirca for the treatment of pulmonary hypertension will expire in November 2017, after which time we expect to see increased generic competition for Adcirca that could have a material adverse impact on our Adcirca revenues. Lilly has two additional patents expiring in April and November 2020, respectively, covering Adcirca and claiming pharmaceutical compositions and free drug particulate forms (the 2020 Patents). The PTAB has issued a Final Written Decision finding these patents invalid as the result of an IPR proceeding initiated by Actelion Pharmaceuticals Ltd. Lilly’s appeal of the PTAB’s decision is pending before the United States Court of Appeals for the Federal Circuit. In May 2017, we amended our license agreement with Lilly relating to Adcirca, in order to clarify and extend the term of the agreement and to amend the economic terms of the agreement following a patent expiry in November 2017. As a result of this amendment, beginning December 1, 2017, our royalty rate on net product sales of Adcirca will increase from five percent to ten percent, and we will also be required to make milestone payments to Lilly equal to $325,000 for each $1,000,000 in net product sales. In the event that Lilly prevails in one or both of the appeals noted above: (a) the previous five percent royalty rate will apply and the effective date of the new payment structure will be deferred until the expiration, lapse, abandonment or invalidation of the last claim of the 2020 Patents covering commercialization of Adcirca for pulmonary hypertension; and (b) to the extent we had previously paid amounts in excess of five percent, those amounts will be refunded by Lilly. The FDA has already tentatively approved ANDAs filed by at least two generic companies to market generic versions of Adcirca following the expiration of the November 2017 patent. However, Lilly has submitted a request to the FDA for pediatric exclusivity which, if granted, may provide an additional six-month exclusivity period through May 2018. As a result, upon the November 2017 patent expiry discussed above (or following loss of the six-month pediatric exclusivity, if granted), we anticipate the launch of generic versions of Adcirca resulting in decreased Adcirca sales. In addition, beginning in December 2017 we anticipate an increase in Adcirca’s cost of product sales as a percentage of Adcirca’s net product sales due to an increase in our royalty and milestone expenses by virtue of the amendment to our license agreement with Lilly.

 

Patent expiration, patent litigation and generic competition for any of our commercial PAH products could have a significant, adverse impact on our revenues, profits and stock price, and is inherently difficult to predict. For additional discussion, refer to the risk factor entitled, Our intellectual property rights may not effectively deter competitors from developing competing products that, if successful, could have a material adverse effect on our revenues and profits, contained in Part IIItem 1A—Risk Factors included in this Quarterly Report on Form 10-Q.

 

Operating Expenses

 

Since our inception, we have devoted substantial resources to our various clinical trials and other research and development efforts, which are conducted both internally and through third parties. From time to time, we also license or acquire additional technologies and compounds to be incorporated into our development pipeline.

 

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Our operating expenses include the following costs:

 

Cost of Product Sales

 

Our cost of product sales primarily includes costs to manufacture and acquire products sold to customers, royalty and milestone payments under license agreements granting us rights to sell related products, direct and indirect distribution costs incurred in the sale of products, and the costs of inventory reserves for current and projected obsolescence. These costs also include share-based compensation and salary-related expenses for direct manufacturing and indirect support personnel, quality review and release for commercial distribution, direct materials and supplies, depreciation, facilities-related expenses and other overhead costs.

 

Research and Development

 

Our research and development expenses primarily include costs associated with the research and development of products and post-marketing research commitments. These costs also include share-based compensation and salary-related expenses for research and development functions, professional fees for preclinical and clinical studies, costs associated with clinical manufacturing, facilities-related expenses, regulatory costs and costs associated with pre-FDA approval payments to third-party contract manufacturers. Expenses also include costs for third-party arrangements, including upfront fees and milestone payments required under license arrangements for therapies under development. We have incurred, and expect to continue to incur, increased clinical trial-related expenses during 2017, driven by the recent expansion of our pipeline programs, which will result in the enrollment of several large clinical studies.

 

Selling, General and Administrative

 

Our selling, general and administrative expenses primarily include costs associated with the commercialization of approved products and general and administrative costs to support our operations. Selling expenses also include share-based compensation, salary-related expenses, product marketing and sales operations costs, and other costs incurred to support our sales efforts. General and administrative expenses also include our core corporate support functions such as human resources, finance and legal, external costs such as insurance premiums, legal fees, grants to non-affiliated, non-profit organizations, and other professional service fees.

 

Share-Based Compensation

 

Historically, we granted stock options under our Amended and Restated Equity Incentive Plan (the 1999 Plan) and awards under our Share Tracking Awards Plans (STAP). In June 2015, our shareholders approved the United Therapeutics Corporation 2015 Stock Incentive Plan (the 2015 Plan), which authorizes the issuance of up to 6,150,000 shares of our common stock. Following approval of the 2015 Plan, we ceased granting awards under the STAP and the 1999 Plan, and we modified our equity compensation programs to grant stock options to employees who previously received STAP awards, and to grant stock options and restricted stock units to non-employee directors. In October 2017, we also began issuing restricted stock units to employees. Over time, we expect to increase the percentage of our equity awards made to employees in the form of restricted stock units, instead of stock options. The grant date fair values of stock options and restricted stock units are recognized as share-based compensation expense ratably over their vesting periods.

 

The fair values of STAP awards and stock option grants are measured using inputs and assumptions under the Black-Scholes-Merton model. The fair value of restricted stock units is measured using our stock price on the date of grant.

 

Although we have ceased granting STAP awards, we still have a significant number of STAP awards outstanding. We account for STAP awards as liabilities because they are settled in cash. As such, we must re-measure the fair value of STAP awards at the end of each financial reporting period until the awards are no longer outstanding. Changes in our STAP liability resulting from such re-measurements are recorded as adjustments to share-based compensation (benefit) expense and can create substantial volatility within our operating expenses from period to period. The following factors, among others, have a significant impact on the amount of share-based compensation (benefit) expense recognized in connection with STAP awards from period to period: (1) volatility in the price of our common stock (specifically, increases in the price of our common stock will generally result in an increase in our STAP liability and related compensation expense, while decreases in our stock price will generally result in a reduction in our STAP liability and related compensation expense); (2) changes in the number of outstanding awards; and (3) changes in the number of vested and unvested awards.

 

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Research and Development

 

We focus most of our research and development efforts on the following near-term pipeline programs (intended to result in product launches in the 2018-2021 timeframe) and medium-term pipeline programs (intended to result in product launches in the 2022-2025 timeframe). We are also engaged in a variety of additional medium- and longer-term research and development efforts, including technologies designed to increase the supply of transplantable organs and tissues and improve outcomes for transplant recipients.

 

Near-Term Pipeline Programs (2018-2021)

 

Product

 

Mode of Delivery

 

Indication

 

Current Status
STUDY NAME CAPS

 

Our Territory

RemoSynch™
(Implantable System for Remodulin)

 

Continuous intravenous via implantable pump

 

PAH

 

Pending regulatory approvals and launch preparations.

 

United States, United Kingdom, Canada, France, Germany, Italy and Japan

RemUnity™
(treprostinil)

 

Continuous subcutaneous via pre-filled, semi-disposable pump

 

PAH

 

Pre-NDA

 

Worldwide

OreniPlus™
(Orenitram in combination with approved background therapy)

 

Oral

 

PAH
(decrease morbidity and mortality)

 

Phase IV
FREEDOM-EV

 

Worldwide

Tysuberprost™
(esuberaprost in combination with Tyvaso)

 

Oral (esuberaprost)
Inhaled (Tyvaso)

 

PAH
(decrease morbidity and mortality)

 

Phase III
BEAT

 

North America, Europe, Mexico, South America, Egypt, India, Israel, South Africa and Australia

RemoPro™ (pain-free subcutaneous Remodulin prodrug)

 

Continuous subcutaneous

 

PAH

 

Pre-Clinical

 

Worldwide

Dinutuximab

 

Intravenous

 

Small cell lung cancer

 

Phase II/III
DISTINCT

 

Worldwide

Tyvaso-ILD™
(treprostinil)

 

Inhaled

 

Pulmonary hypertension associated with idiopathic pulmonary fibrosis (WHO Group 3)

 

Phase III
INCREASE

 

Worldwide

 

Medium-Term Pipeline Programs (2022-2025)

 

Product

 

Mode of Delivery

 

Indication

 

Current Status
STUDY NAME CAPS

 

Our Territory

Tyvaso (treprostinil)

 

Inhaled

 

Pulmonary hypertension associated with chronic obstructive pulmonary disease (WHO Group 3)

 

Phase III
PERFECT

 

Worldwide

Aurora-GT™
(eNOS gene therapy)

 

Intravenous

 

PAH

 

Phase II/III
SAPPHIRE

 

United States

OreniLeft™
(treprostinil)

 

Oral

 

Pulmonary hypertension associated with left ventricular diastolic dysfunction
(WHO Group 2)

 

Phase III
SOUTHPAW

 

Worldwide

 

RemoSynch (Implantable System for Remodulin)

 

We are working with Medtronic, Inc. (Medtronic) on a program to develop Medtronic’s proprietary intravascular infusion catheter to be used with its SynchroMed® II implantable infusion pump and related infusion system components (together referred to as the Implantable System for Remodulin, or RemoSynch) in order to deliver Remodulin for the treatment of PAH. The SynchroMed II device is already approved for delivery of medication to treat neuropathic pain. With our funding,

 

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Medtronic completed the DelIVery clinical trial, which studied the safety of the Implantable System for Remodulin. The primary objective was to demonstrate a rate of catheter-related complications below 2.5 per 1,000 patient-days while using the Implantable System for Remodulin. In 2013, Medtronic informed us that this primary objective was met. If the Implantable System for Remodulin is approved, the technology has the potential to reduce many of the patient burdens and other complications associated with the use of external pumps to administer prostacyclin analogues. In order to launch RemoSynch in the United States, Medtronic and we are pursuing parallel regulatory filings relating to the device and the drug, respectively. Assuming we and Medtronic obtain the necessary regulatory approvals, we anticipate launching RemoSynch in the 2018-2021 timeframe.

 

Medtronic is entirely responsible for regulatory approvals and all manufacturing and quality systems related to its infusion pump and related components. Medtronic has received a consent decree citing violations of the quality system regulation for medical devices and requiring it to stop manufacturing, designing and distributing SynchroMed II implantable infusion pump systems, except in limited circumstances, until the FDA determines that Medtronic has met all the provisions listed in the consent decree. It is unclear how this consent decree will impact our ability to obtain FDA approval for RemoSynch, or its commercial prospects if approved.

 

RemUnity and RemoPro

 

In December 2014, we entered into an exclusive agreement with DEKA Research & Development Corp. (DEKA) to develop a pre-filled, semi-disposable pump system for subcutaneous delivery of treprostinil, which we call the RemUnity system. Under the terms of the agreement, we are funding the development costs related to the RemUnity system and will pay product fees and a single-digit royalty to DEKA based on commercial sales of the system and the treprostinil drug product sold for use with the system. Currently, we are engaged in engineering, design and development efforts to optimize the RemUnity pump to deliver treprostinil in pre-filled reservoirs, and intend to complete human factor studies and functionality testing in patients before submitting an application to the FDA to approve the pre-filled RemUnity pump.

 

We are also engaged in pre-clinical development of a new prodrug formulation of Remodulin called RemoPro, which is intended to enable subcutaneous delivery without the site pain currently associated with subcutaneous Remodulin. A prodrug is a metabolically inactive compound that, after administration, metabolizes into an active compound. RemoPro is intended to be inactive in the subcutaneous tissue, which should eliminate site pain. Once RemoPro is absorbed into the blood, it metabolizes into treprostinil. RemoPro is intended to be administered using the RemUnity system.

 

Orenitram, OreniPlus and OreniLeft

 

In 2013, the FDA approved Orenitram for the treatment of PAH patients to improve exercise capacity. The primary study that supported efficacy of Orenitram was a 12-week monotherapy study (FREEDOM-M) in which PAH patients were not on any approved background PAH therapy.

 

In order for Orenitram to reach its full commercial potential, we believe we need to complete further studies to support an amendment to Orenitram’s label to indicate that Orenitram delays morbidity and/or mortality (also known as “time to clinical worsening”) in PAH patients who are on an approved oral background therapy. We refer to this initiative to amend Orenitram’s label as OreniPlus. As such, we are conducting a phase IV registration study called FREEDOM-EV, which is intended to support such a label amendment if successful. In September 2017, we announced that the independent data monitoring committee (DMC) for the FREEDOM-EV study had completed a pre-specified interim safety and efficacy analysis. The DMC did not identify any new safety concerns associated with Orenitram therapy, and recommended that the trial be continued as planned without modification. We anticipate full results of the study will be available during the second half of 2018.

 

We are also enrolling patients in a study of Orenitram (SOUTHPAW) to treat WHO Group 2 pulmonary hypertension (specifically associated with left ventricular diastolic dysfunction), which we refer to as OreniLeft. There are presently no FDA approved therapies indicated for treatment of WHO Group 2 pulmonary hypertension.

 

Tysuberprost

 

In 2012, we completed a phase I safety study of esuberaprost, a single-isomer orally bioavailable prostacyclin analogue, and the data suggested that dosing esuberaprost four times a day was safe. We believe that esuberaprost and treprostinil have differing prostacyclin receptor-binding profiles and thus could provide safety and efficacy benefits to certain groups of patients when used in combination. We also believe that inhaled treprostinil and oral esuberaprost have complementary pharmacokinetic and pharmacodynamic profiles, which indicate that they should provide greater efficacy in combination. As a result, in March 2017 we completed enrollment of our phase III registration study called BEAT (BEraprost 314d Add-on to Tyvaso) to evaluate the clinical benefit and safety of esuberaprost in combination with Tyvaso for patients with PAH who show signs of

 

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deterioration on Tyvaso or have a less than optimal response to Tyvaso treatment. We refer to the resulting use of esuberaprost and Tyvaso therapies in combination with each other as Tysuberprost.

 

Unituxin

 

Under our Biologics License Application (BLA) approval for Unituxin, the FDA has imposed certain post-marketing requirements and post-marketing commitments on us. We are conducting additional clinical and non-clinical studies to satisfy these requirements and commitments. While we believe we will be able to complete these studies, any failure to satisfy these requirements or commitments could result in penalties, including fines or withdrawal of Unituxin from the market, unless we are able to demonstrate good cause for the failure.

 

In addition, we are conducting studies of Unituxin in adult patients with other forms of GD2-expressing cancers. We are currently enrolling the first of these studies, called DISTINCT, in patients with small cell lung cancer. These research and development efforts into new indications for Unituxin have been substantially outsourced to a contract research organization called Precision Oncology, LLC.

 

Unituxin therapy is associated with severe side effects, including infections, infusion reactions, hypokalemia, hypotension, pain, fever, and capillary leak syndrome. In post-approval use of Unituxin, the adverse reactions of prolonged urinary retention, transverse myelitis, and reversible posterior leukoencephalopathy syndrome have been observed. Unituxin’s label also includes a boxed warning related to serious infusion reactions and neurotoxicity.

 

Finally, we are working on the development of a fully humanized (non-chimeric) version of dinutuximab, the active ingredient in Unituxin. This new version is expected to reduce some of the side effects associated with Unituxin, which is a chimeric composed of a combination of mouse and human proteins.

 

Tyvaso and Tyvaso-ILD

 

In October 2017, we received FDA approval of a supplement to our NDA for Tyvaso, covering a new inhalation device as part of the Tyvaso Inhalation System. The new device, called the TD-300/A, was designed based on physician and prescriber feedback, and is intended to aid patient compliance and enhance ease of use. We plan to launch the TD-300/A in 2018, which we believe will help reduce the rate of Tyvaso discontinuation associated with the current device. Beyond the TD-300/A, we are engaged in additional research and development efforts into new devices to further optimize the delivery of inhaled treprostinil.

 

We have commenced a phase III registration study called INCREASE, which is a study of Tyvaso in patients with WHO Group 3 pulmonary hypertension associated with interstitial lung disease (specifically associated with idiopathic pulmonary fibrosis or combined pulmonary fibrosis and emphysema), which we refer to as Tyvaso-ILD. We are also planning a phase III registration study called PERFECT (Pulmonary hypertension EnRichment study For the Evaluation of COPD with Tyvaso), which is a study of Tyvaso in patients with WHO Group 3 pulmonary hypertension associated with chronic obstructive pulmonary disease. There are presently no FDA approved therapies indicated for treatment of WHO Group 3 pulmonary hypertension.

 

Aurora-GT

 

We have commenced enrollment of a phase II/III study (called SAPPHIRE) of a gene therapy product called Aurora-GT, in which a PAH patient’s own endothelial progenitor cells are isolated, transfected with the gene for human endothelial NO-synthase (eNOS), expanded ex-vivo and then delivered to the same patient. This product is intended to rebuild the blood vessels in the lungs that are destroyed by PAH. This study is being conducted entirely in Canada, and sponsored by Northern Therapeutics, Inc., a Canadian entity in which we have a 49.7% voting stake and a 71.8% financial stake. We have the exclusive right to pursue this technology in the United States, and plan to seek FDA approval if SAPPHIRE is successful.

 

Future Prospects

 

Our strategy is to continue to grow the revenues of our existing commercial products, including through approval of new and/or improved indications, formulations and delivery devices. These and other research and development efforts are designed to provide continued revenue growth in the near and medium term, while efforts are under way to develop technologies in organ manufacturing in the longer term.

 

Our ability to achieve these objectives and sustain our growth and profitability will depend on many factors, including among others: (1) the timing and outcome of preclinical research, clinical trials and regulatory approvals for products we develop; (2) the timing and degree of success related to the commercial launch of new products; (3) the demand for our products; (4) the price of our products and the reimbursement of our products by public and private health insurance organizations; (5) the competition we face within our industry, including competition from generic companies; (6) our ability to effectively manage our business in an increasingly complex legal and regulatory environment; (7) our ability to defend against

 

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generic competition and challenges to our patents; and (8) the risks identified in Part II, Item 1A—Risk Factors, included in this Quarterly Report on Form 10-Q.

 

We will need to construct additional facilities to support the development and commercialization of our products and technologies. We have budgeted for capital expenditures of approximately $250.0 million over the next three years.

 

We operate in a highly competitive market in which a small number of large pharmaceutical companies control a majority of available PAH therapies. These pharmaceutical companies are well established in the market and possess greater financial, technical and marketing resources than we do. In addition, there are a number of investigational products in late-stage development that, if approved, may erode the market share of our existing commercial therapies and make market acceptance more difficult to achieve for any therapies we attempt to market in the future.

 

Three and Nine Months Ended September 30, 2017 and September 30, 2016

 

Revenues

 

The following table presents the components of total revenues (dollars in millions):

 

 

 

Three Months Ended
September 30,

 

Percentage

 

Nine Months Ended
September 30,

 

Percentage

 

 

 

2017

 

2016

 

Change

 

2017

 

2016

 

Change

 

Net product sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Remodulin

 

$

187.3

 

$

152.4

 

23

%

$

490.8

 

$

451.1

 

9

%

Tyvaso

 

88.9

 

101.8

 

(13

)%

280.5

 

311.0

 

(10

)%

Adcirca

 

99.8

 

96.0

 

4

%

300.4

 

259.5

 

16

%

Orenitram

 

52.5

 

40.7

 

29

%

137.8

 

118.9

 

16

%

Unituxin

 

17.0

 

17.3

 

(2

)%

51.1

 

49.3

 

4

%

Total revenues

 

$

445.5

 

$

408.2

 

9

%

$

1,260.6

 

$

1,189.8

 

6

%

 

Revenues for the three months ended September 30, 2017 increased by $37.3 million as compared to the same period in 2016. The growth in revenues primarily resulted from a $34.9 million increase in Remodulin net product sales. During the three months ended September 30, 2017, an international distributor made a one-time purchase of Remodulin inventory of $47.4 million due to an expansion of the distributor’s commercial responsibilities. Because the payment terms span two quarters, our net revenues increased by $23.7 million during the three months ended September 30, 2017, with an additional increase of $23.7 million expected in the fourth quarter. The remaining increase in Remodulin net product sales of $11.2 million was due to an increase in the number of patients being treated with Remodulin. Additional revenue growth resulted from an $11.8 million increase in Orenitram net product sales due to an increase in the number of patients being treated with Orenitram and a $3.8 million increase in Adcirca net product sales primarily due to price increases, which were determined by Lilly. These increases were partially offset by a $12.9 million decrease in Tyvaso net product sales and a $0.3 million decrease in Unituxin net product sales. $12.2 million of the decrease in Tyvaso net product sales was due to an additional one-time $12.2 million liability for estimated Medicaid rebates relating to Tyvaso sales prior to July 1, 2017 that we recorded during the three months ended September 30, 2017.

 

Revenues for the nine months ended September 30, 2017 increased by $70.8 million compared to the same period in 2016. Adcirca net product sales increased $40.9 million, primarily due to price increases, which were determined by Lilly. Remodulin net product sales increased $39.7 million, due to (1) $23.7 million of revenue from a one-time sale to a distributor, as noted above; and (2) $16.0 million of revenue due to an increase in the number of patients being treated with Remodulin. Additional revenue growth resulted from an $18.9 million increase in Orenitram net product sales due to an increase in the number of patients being treated with Orenitram and a $1.8 million increase in Unituxin net product sales. These increases were partially offset by a $30.5 million decrease in Tyvaso net product sales. $11.1 million of the decrease in Tyvaso net product sales during the nine months ended September 30, 2017, was due to an additional one-time $12.2 million liability for estimated Medicaid rebates relating to Tyvaso sales prior to July 1, 2017 that we recorded during the three months ended September 30, 2017. We believe the remaining $19.4 million decrease in Tyvaso sales resulted from the availability of oral prostacyclin-class therapies, and increased propensity to treat patients with multiple oral therapies earlier in their disease progression, which can delay the need to prescribe inhaled therapies. Given the progressive nature of PAH, we believe many patients will initiate Tyvaso in the future as their disease progresses.

 

We recognize revenues net of: (1) estimated rebates and chargebacks; (2) prompt pay discounts; (3) allowances for sales returns; and (4) distributor fees. These are referred to as gross-to-net deductions and are based on historical experiences and

 

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contractual and statutory requirements. The tables below include a reconciliation of the accounts associated with these deductions (in millions):

 

 

 

Three Months Ended September 30, 2017

 

 

 

Rebates and
Chargebacks

 

Prompt Pay
Discounts

 

Allowance for
Sales Returns

 

Distributor
Fees

 

Total

 

Balance, July 1, 2017

 

$

50.1

 

$

5.6

 

$

7.1

 

$

2.6

 

$

65.4

 

Provisions attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

57.1

 

9.6

 

0.4

 

3.6

 

70.7

 

Prior periods

 

13.1

 

 

 

 

13.1

 

Payments or credits attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

(7.2

)

(5.4

)

 

(0.4

)

(13.0

)

Prior periods

 

(46.6

)

(5.3

)

(0.4

)

(2.4

)

(54.7

)

Balance, September 30, 2017

 

$

66.5

 

$

4.5

 

$

7.1

 

$

3.4

 

$

81.5

 

 

 

 

Three Months Ended September 30, 2016

 

 

 

Rebates and
Chargebacks

 

Prompt Pay
Discounts

 

Allowance for
Sales Returns

 

Distributor
Fees

 

Total

 

Balance, July 1, 2016

 

$

46.0

 

$

4.9

 

$

6.3

 

$

2.8

 

$

60.0

 

Provisions attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

57.0

 

9.5

 

0.4

 

3.4

 

70.3

 

Prior periods

 

(0.2

)

 

 

(0.1

)

(0.3

)

Payments or credits attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

(8.9

)

(5.4

)

 

(1.0

)

(15.3

)

Prior periods

 

(43.2

)

(4.5

)

 

(2.5

)

(50.2

)

Balance, September 30, 2016

 

$

50.7

 

$

4.5

 

$

6.7

 

$

2.6

 

$

64.5

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

Rebates and
Chargebacks

 

Prompt Pay
Discounts

 

Allowance for
Sales Returns

 

Distributor
Fees

 

Total

 

Balance, January 1, 2017

 

$

46.0

 

$

4.3

 

$

7.7

 

$

2.8

 

$

60.8

 

Provisions attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

164.1

 

28.4

 

0.5

 

10.1

 

203.1

 

Prior periods

 

13.3

 

 

 

(0.2

)

13.1

 

Payments or credits attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

(106.8

)

(24.0

)

 

(6.6

)

(137.4

)

Prior periods

 

(50.1

)

(4.2

)

(1.1

)

(2.7

)

(58.1

)

Balance, September 30, 2017

 

$

66.5

 

$

4.5

 

$

7.1

 

$

3.4

 

$

81.5

 

 

 

 

Nine Months Ended September 30, 2016

 

 

 

Rebates and
Chargebacks

 

Prompt Pay
Discounts

 

Allowance for
Sales Returns

 

Distributor
Fees

 

Total

 

Balance, January 1, 2016

 

$

44.6

 

$

3.9

 

$

5.3

 

$

2.6

 

$

56.4

 

Provisions attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

154.7

 

27.5

 

1.9

 

9.4

 

193.5

 

Prior periods

 

4.0

 

 

 

 

4.0

 

Payments or credits attributed to sales in:

 

 

 

 

 

 

 

 

 

 

 

Current period

 

(110.4

)

(23.2

)

 

(6.8

)

(140.4

)

Prior periods

 

(42.2

)

(3.7

)

(0.5

)

(2.6

)

(49.0

)

Balance, September 30, 2016

 

$

50.7

 

$

4.5

 

$

6.7

 

$

2.6

 

$

64.5

 

 

28



Table of Contents

 

Cost of Product Sales

 

The table below summarizes cost of product sales by major category (dollars in millions):

 

 

 

Three Months Ended
September 30,

 

Percentage

 

Nine Months Ended
September 30,

 

Percentage