United Therapeutics

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

United Therapeutics is a biotechnology company focused on the development and commercialization of unique products to address unmet medical needs in patients with pulmonary hypertension and other chronic and life-threatening diseases.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Moat Assessment

United Therapeutics (UTHR) is a biopharmaceutical company specializing in the development and commercialization of therapies for chronic and life-threatening conditions. A significant portion of their revenue is derived from pulmonary arterial hypertension (PAH), a disease with limited treatment options, giving them a niche position. The company has a vertically integrated model that spans from drug development and manufacturing to distribution and patient support. This creates complexity, but also control and potentially an advantage through cost control.

Moat Analysis

While not possessing a wide moat, UTHR demonstrates elements of a narrow moat, primarily based on the following:

  1. Intangible Assets (Patents and Regulatory Approvals): UTHR’s portfolio is protected by a range of patents and regulatory exclusivity for their key products, which provide a barrier to entry against competitors. However, patents are not forever, and competitors will eventually launch generic versions.
  2. High Switching Costs: Many of the treatments are chronic and rely on unique methods of delivery, creating some switching costs, which make it less likely for patients to change their medication. However, new therapies are continuously under development which may present superior or cheaper options.
  3. Scale & Cost Advantages: The highly specialized delivery systems and drugs require specific infrastructure, which competitors must invest in to compete. UTHR has built up this infrastructure over time and has established itself as a reputable player in the niche segment, giving it some relative scale advantage.

Given these factors, we assign a moat rating of 3/5. It’s not a rock-solid wide moat, due to the nature of drug development and competition, but a narrow one, due to the competitive advantages it has been able to attain through niche markets, specialized knowledge, proprietary methods and patents, and barriers to entry.

Risks to the Moat and Business Resilience

Despite the moat, UTHR faces several risks that could erode their competitive position. These include:

  1. Patent Expiration and Generic Competition: The expiration of key patents for existing products poses a significant threat. Generic manufacturers can often offer substantially lower-priced alternatives, directly impacting UTHR’s revenue and profitability. Management acknowledges this and is pushing on new pipeline drugs.
  2. Clinical Trial Failures & Drug Approval Risks: A high dependency on its existing pipeline exposes UTHR to clinical trial failures or difficulties in obtaining regulatory approvals for new drugs or existing drugs for new indications. This has already occurred with some of its key drug programs.
  3. Competition from New Therapies: Continuous innovation in the pharmaceutical sector means that competitors may develop new and more effective treatments that can displace UTHR’s existing portfolio. New companies may use a similar or better delivery system to deliver drugs in the market, challenging UTHR’s dominance.
  4. Pricing and Reimbursement Pressures: The government’s increasing efforts to control drug costs and changes in reimbursement policies by insurance companies can reduce profit margins. This risk is particularly relevant to UTHR’s expensive, specialty therapies, which are high on government’s cost list.
  5. Reliance on a Few Key Products: While UTHR has a portfolio of drugs, a significant portion of their revenue is derived from a small number of main therapies. If these drugs were to become obsolete due to competition or regulation changes, their economic moat would likely disappear.
  6. Manufacturing Issues: Being a highly specialized manufacturing company, any disruption to their supply chain or manufacturing operations, like recalls or problems scaling production, can materially impact their revenue and profitability.

Business Operations in Detail

Revenue Streams

UTHR primarily generates revenue from the sales of:

  • Remodulin (treprostinil): an injectable prostacyclin used to treat PAH. This drug has different delivery options including intravenous and subcutaneous injections.
  • Tyvaso (treprostinil): an inhaled prostacyclin for PAH, which is UTHR’s main growth driver. It includes the original Tyvaso as well as Tyvaso DPI (dry powder inhaler). This offers advantages over competitor drugs due to its delivery method.
  • Orenitram (treprostinil): an oral prostacyclin for PAH, which is positioned as convenient alternative for chronic use.
  • Adcirca (tadalafil): a PDE-5 inhibitor for PAH, which is facing heavy generic competition.
  • Unituxin (dinutuximab): an immunotherapy to treat high-risk neuroblastoma, which is not a major revenue driver compared to UTHR’s pulmonary hypertension drugs.

While other drugs exist in their pipeline and are being developed, these are the key drivers of revenue for UTHR. UTHR has been successful in innovating and bringing drugs to market, but its sales are still highly dependent on its pulmonary hypertension drugs.

UTHR also derives revenue from distribution arrangements, most notably with Sandoz for Remodulin. However, a recent dispute over pricing and distribution with Sandoz may affect future sales, due to contractual issues.

The biopharmaceutical industry is characterized by several important trends:

  • Innovation: Constant innovation is needed as a key driver. New and more advanced treatments are being continuously developed. Competition is high and successful innovation is essential for long-term success.
  • Regulation: Regulatory hurdles are significant and require long periods of costly clinical trials and approvals. These regulations also have an effect on what new drugs can be used in the market.
  • Generic Entry: After the patent expiration of a drug, the entry of cheaper, generic versions of a drug is almost always a certainty. It can also increase price pressure on branded drugs.
  • Emphasis on Specialty Drugs: There is a growing trend towards more specialized medications, which target a narrow but underserved patient populations that can fetch a premium price. It requires a large investment in research and marketing.
  • Cost Containment Measures: Due to spiraling drug prices, government and payers are trying to reduce drug costs. This creates pressure for drug makers to improve their pricing strategies, and potentially make it harder to gain meaningful profits.

Margins

UTHR has a history of strong gross and operating margins due to a lack of competition in their key markets. They achieve high margins on Remodulin, Tyvaso, and Orenitram due to the high barriers of entry, and specialized delivery methods, while managing their operational cost efficiently. The gross margins are above 70%, but that might change in the future with increasing competition. However, a large portion of their operating costs come from research and development, which means it might be subject to change based on the pipeline and investment decisions. In addition, UTHR’s reliance on outside manufacturing partners, like contract manufacturers for raw materials, can have a substantial effect on the cost of products. The company’s marketing and administrative expenses are much lower because the targeted treatments are specifically for pulmonary hypertension, making targeted advertisement more effective.

Competitive Landscape

The pharmaceutical sector has high competition but within a very narrow niche market. As a company focusing on pulmonary hypertension, UTHR must compete against specialized pharmaceutical and biotechnology companies that also operate in the same field. Some of its main competitors include:

  • Johnson & Johnson: A large pharmaceutical company selling several drugs for pulmonary hypertension such as Opsumit and Uptravi.
  • Bayer: A major pharmaceutical company involved in research and clinical trials for therapies to treat PAH.
  • Pfizer: This company sells Revatio and Adempas for PAH, as well as other treatments for heart-related diseases.
  • Others: Smaller pharmaceutical and biotech companies are working to bring to the market new treatment options, some of which include drugs that treat PAH.

What makes UTHR different from these competitors is their focus solely on PAH drugs, their novel delivery methods, and the full ownership of their manufacturing processes which helps maintain the profit margins on their drugs.

In addition, UTHR is trying to grow its pipeline drugs to have a diversified business and avoid the reliance on a single group of drugs. Their interest in areas such as heart failure, oncology, and regenerative medicine has also become increasingly important, but it’s still too early to evaluate their value to the company’s portfolio.

Financial Analysis

Based on its last annual report, UTHR has shown a resilient performance through sales growth, a consistent operating income, a strong cash position, and reduced reliance on external debt. Revenue has increased from $1.8B in 2021 to $2.1B in 2023 due to its increased reliance and growth on Tyvaso. Operating expenses also have seen an increase, mainly because of an increase in research and development. While this might lower the margins in the short-term, it would increase the likelihood of longer-term growth with new drug pipelines. However, UTHR remains very profitable with net income above $700M in 2023. As of June 2024, UTHR has $3.6B in cash which gives flexibility to improve the manufacturing capabilities or acquire new assets. Long-term debt is negligible for the company. Despite all the challenges in the biotechnology and pharmaceutical industry, it has maintained a strong and healthy balance sheet.

However, the Sandoz dispute has a potential for a future decrease in the revenues of Remodulin. And the potential generic launch of Revatio may put pressure on the sales of Adcirca. Management believes that the growth of Tyvaso in the short-term could offset this decline.

Understandability Rating

The business model of UTHR, although seemingly complex in the delivery of niche therapies, is still relatively easy to understand, especially as it is concentrated on a small set of core products and a defined niche market. Their financial reports, also, are not too complicated to understand for the most part, and it’s easy to discern how cash is generated. We, therefore, give UTHR an understandability rating of 4/5.

Balance Sheet Health Rating

UTHR has a very healthy balance sheet with a high cash position, significant assets, and very low debt, all of which can contribute to weathering any financial shocks and helping the company pursue its goals. Therefore, we give them a balance sheet rating of 4/5

Conclusion

United Therapeutics shows strong prospects with its expertise in pulmonary hypertension treatments and a growing pipeline. Although it’s exposed to risk of expiring patents and generic competition, it possesses a niche market that can offer above-average growth opportunities. The company has a very healthy balance sheet and is led by experienced and qualified managers, which means it can weather many potential storms, but it will not be free of volatility in the pharmaceutical sector. The investor, therefore, should focus their analysis on the quality of the pipeline, the patent expiration timeline, the company’s efforts to expand the usage of its current drugs, and the management’s capability to execute its strategies and overcome potential setbacks.