United Therapeutics Corporation

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 5/5

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 diseases, with a primary emphasis on pulmonary hypertension (PH).

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.

UTHR’s business is fundamentally driven by its portfolio of approved therapies for pulmonary hypertension (PH). However, it is important to understand its complexities, and the risks associated with it.

UTHR operates primarily within the pharmaceutical industry. Here’s a breakdown:

  • Revenues: UTHR’s revenue streams primarily from the sale of pharmaceutical products, specifically those targeting pulmonary hypertension (PH).
    • Tavbsy, Remodulin, Orenitram and Tyvaso DPI are the main drivers for revenue.
    • The geographical revenue breakdown is significant; while the US market accounts for the largest share, Europe and other parts of the world are an increasing part of revenues.
  • Industry Trends:
    • The pharmaceutical industry, and particularly the biotech segment, is characterized by substantial investment in research and development (R&D), high regulatory hurdles, long product cycles, and high pricing pressures.
    • The market for PH treatments is marked by unmet needs and high growth potential. New therapies and technologies can create huge value, but there is also a lot of risk.
  • Margins:
    • UTHR has historically had extremely high gross and operating margins. This high level of profitability can be explained by high sales volume coupled with price premiums driven by the highly specialized and lifesaving nature of their products.
    • However, this profitability has seen a decline, which has been primarily attributed to an increase in the level of competitive pressures.
  • Competitive Landscape:
    • While UTHR’s core products have demonstrated success, they are not without competition. There are a number of existing pharmaceutical companies that offer alternative therapies.
    • The development of new medicines by competitors can directly challenge UTHR’s pricing power. Some biosimilar products are becoming increasingly prevalent, and this could put pressure on UTHR’s product prices.
    • Differentiation: UTHR seeks to differentiate itself by focusing on innovative therapies and drug delivery systems, such as the use of implantable pumps and inhaled medications, which are designed to increase patient comfort and improve clinical outcomes.
      • This strategy has been successful for many years, which has created brand loyalty amongst patients and prescribing physicians. UTHR also focuses on the science and innovation behind its drug development processes.

One of the biggest risks of UTHR is related to patent expiration or loss of exclusivity, which is important as UTHR is heavily reliant on its IP.

Financials in Depth

  • Balance Sheet: The company is strong. In its most recent report, UTHR’s cash, cash equivalents and marketable investments reached more than $3.8 Billion against $888 million of total liabilities, showing an exceptionally healthy balance sheet. That is an indicator of the stability and financial safety of the company.
  • Income Statement: Revenue growth for Tyvaso in the nine-month period ending in September of 2023 was up 35 percent year-over-year. Revenue growth is likely to decelerate going into 2024 as the drug faces increasing competition from other manufacturers. Revenues in Remodulin decreased year-over-year (around -15%) showing that there is a decrease in demand for the legacy medication, while other drugs see increased sales.
  • Share repurchases were accelerated for this reporting period, which is always positive.
  • Cash Flow: UTHR reported $673 million in cash from operations for the period of 9 months ending in September of 2023, which is impressive. The company is generating lots of cash, and the positive free cash flow can be used for reinvestments in the company or to create value for shareholders through share buybacks.

Moat Assessment

Based on the analysis, UTHR’s moat is rated as 2 out of 5:

  • Intangible Assets (Rating: 3/5) : UTHR has a strong patent portfolio for its existing drugs, and has a very impressive brand recognition among doctors and patients, which gives the company some ability to command premium pricing. However, patents and brand value do not last forever. The patent expiration or the potential legal challenges to patents is something to keep in mind.
  • Switching Costs (Rating 2/5): There are some switching costs for patients to go to competitor medications, but it is not extremely sticky. Physicians may choose to switch depending on insurance, ease of use, and effectiveness of competitor options. Furthermore, insurance companies can also dictate what options to prescribe.
  • Network Effect: (Rating 1/5): UTHR doesn’t have the network effect, as the value of its products doesn’t necessarily increase with more users.
  • Cost Advantages: (Rating 1/5): UTHR faces very high operating and regulatory costs, and has minimal cost advantages over the competition.

While UTHR has strong positions in certain key segments, the competition from other pharmaceutical companies, generics, and biosimilars makes a true and sustainable moat difficult to establish. Thus, it can be said the moat has certain advantages, but they are not that strong or impenetrable to withstand all competition.

Risks to the Moat and Business Resilience

  • Competition: The most obvious risk is the threat of competition. There are several other companies developing treatments for PH. As new medications enter the market, UTHR’s pricing power may diminish, and so will its earnings power. This competition can result from both branded competitors and biosimilars.
  • Patent Expiration: UTHR’s existing patents, especially for Remodulin and Tyvaso DPI, are a great source of value. As these patents expire, generic manufacturers may enter the market, forcing prices downwards, thus lowering UTHR’s profits. Some of the upcoming patents include the Remodulin patents which have now expired (the patents for Remodulin were extended until 2020 and then lost). In order to combat this, UTHR needs to develop new treatments for PH.
  • Regulatory Changes: The pharmaceutical industry is heavily regulated and changes in the FDA process, or in government regulations, may disrupt UTHR’s business and slow down development.
  • Clinical Trial Failure: UTHR spends vast amount of resources on research and development of new drug candidates. There is a chance that these drugs will not work or may fail in clinical trials.
  • Financial Leverage: UTHR has some debt, so financial leverage can increase the risk of bankruptcy or financial distress for the company. However, UTHR has a extremely solid balance sheet which makes this a low probability event.

The company has shown very high margins and profitability, which gives it the stability and buffer to withstand some turmoil. UTHR also has a very diversified sales base and also a diversified production chain to maintain its operations with limited business disruption and also a vast pipeline of drug candidates and products. Thus, the company appears to be relatively resilient to market volatility and external influences.

Understandability

Based on the analysis, UTHR is rated a 4 out of 5 for understandability:

  • The core business concept (developing and commercializing drugs for pulmonary hypertension) is relatively simple, but fully understanding all the complexities requires specific medical and clinical knowledge which may not be available to everyone. It also requires understanding drug development processes. Furthermore, the financial statements and valuation models require technical accounting, financial, and valuation analysis to be properly interpreted. UTHR is more complex than typical industrial or consumer goods firms, and its financials have some nuances.

Balance Sheet Health

Based on the analysis, UTHR has a very healthy balance sheet and receives a score of 5 out of 5:

  • UTHR has minimal debt compared to its high levels of cash and short-term investments.
  • The company has a very strong cash flow generation which will be able to satisfy its debt obligations.
  • The company is consistently profitable which also gives it a further cushion for its financial health.

Recent Issues and Management’s Perspective

  • Concerns Regarding Drug Development: UTHR faces a risk that new drug candidates will not pan out in clinical trials, and that competing drugs will gain market share before UTHR does. One of the major reasons for the drop in the share price could be attributed to concerns about the long-term success of a particular drug candidate.
    • Management often states that they are not solely reliant on any single candidate, and that they have a diverse pipeline of other potential drugs that may give future growth.
    • In more detail, in a earnings call, management stated: “As we have moved into the clinical phases for our dry powder inhaler formulation of Tyvaso, we have been pleased with the enrollment and speed at which we have been able to get this trial done. We anticipate the data to read out in the first half of next year and if everything goes well, we will continue to pursue the opportunity for this expanded dosing.” and that has helped reassure investors that they are diversifying their pipeline.
  • Competition and Patent Expiration: As competitors develop similar or improved treatments, UTHR could lose market share, or be required to lower its prices, which would negatively affect profitability. And as mentioned before, there is always a risk to patent expirations.
  • Management has been addressing this risk by investing heavily in R&D, hoping to produce new and improved medications to maintain and grow their profit pools. Furthermore, they have been trying to seek out new regulatory niches and areas where competitors may face entry barriers.
  • Management also has been trying to keep prices relatively stable, and has been focusing on the value they are providing to the consumers.

Overall, The Intelligent Investor should be able to invest and analyze this company, but will require some knowledge of pharmaceuticals and biotech. Although this is a good company, investors need to keep a close eye on its competitive landscape and the regulatory pressures that it is currently facing.