United Therapeutics: Buy The Dip – Seeking Alpha

Posted: March 2, 2020 at 4:47 am

On February 26, United Therapeutics (UTHR) came out with earnings results for the fourth quarter of 2019. The companys revenues of $311.11 million were down YoY by 18.43% and fell short of the consensus by $46.06 million. The companys fourth-quarter non-GAAP EPS (earnings per share) of $1.96 also missed the consensus by $1.43.

Subsequently, the stock is down by 11.97% from $112.86 on February 25 to $100.79 on February 27. I believe that this is an investor overreaction, considering that the dip in revenues and EPS is associated with a one-time event of inventory destocking by a distributor in the fourth quarter. Earlier in 2019, this distributor had placed larger-than-normal orders for the companys products due to an error in its patient utilization data. Hence, the smaller-than-normal order in the fourth quarter was an attempt to normalize inventory levels.

Besides this small glitch, the company boasts of robust fundamentals. Today, we will see why United Therapeutics can prove to be an attractive opportunity in 2020.

United Therapeutics is a biotechnology company focused on developing novel, life-extending therapies in lung disease, oncology, and organ manufacturing indications. The company commercializes therapies including an infused formulation of the prostacyclin analog treprostinil, Remodulin; an inhaled formulation of treprostinil, Tyvaso, and a tablet dosage form of treprostinil, Orenitram; and an oral PDE-5 inhibitor, Adcirca, in PAH (pulmonary arterial hypertension) indication. The company also offers Unituxin, a monoclonal antibody for treating neuroblastoma.

United Therapeutics is now working on developing next-generation technologies for Remodulin, Tyvaso, and Orenitram. The companys R&D pipeline also has investigational novel biologics and NCEs (new chemical entities) targeting various lung, oncology, and organ manufacturing indications.

In July 2002, the company secured FDA approval for Remodulin as a continuous subcutaneous infusion for the treatment of PAH patients with NYHA Class II-IV symptoms to diminish symptoms associated with exercise. Despite the launch of a generic treprostinil in early 2019, Remodulins sales were only 2% down YoY to $587 million in 2019. In fact, the company reported the highest number of new Remodulin starts in the last ten years.

The YoY decline in Remodulin sales was attributed to a small number of patients switching to the generic drug, as well as to the fact that new patients start on lower dosages of Remodulin and then begin the process of titrating to their effective dose. Since the patient switching trend has all but trickled down, the company now expects U.S. Remodulin patient demand as well as sales to jump up YoY in 2020.

Remodulin demand has been pretty sticky for years. It is a very complex product targeting a very fragile patient population, which places a high premium on years of safety and supply chain reliability.

United Therapeutics is now getting ready to launch the subcutaneous delivery system for Remodulin injections, the RemUnity system, in July 2020. Co-developed by United Therapeutics and Deka Research and Development and cleared by FDA under the FDA 510(K) pathway, the RemUnity system is expected to reduce the risk of bolus dosing due to pump failures and provides wider arrays of notifications, alerts, and alarms than current pumps. Additionally, the RemUnity system will control Remodulin flow rates without the use of a motor. The pump is small and lightweight with a service life of at least three years.

On February 24, the company announced preliminary analysis from Phase 3 INCREASE study evaluating Tyvaso Inhalation Solution in patients suffering from WHO (World Health Organization) Group 3 pulmonary hypertension associated with PH-ILD (interstitial lung disease). The trial met its primary endpoint of demonstrating improvement in 6MWD (six-minute walk distance). In addition to increasing six-minute walk distance by 21 meters versus placebo after 16 weeks of treatment, Tyvaso also demonstrated significant improvements in each of the study's secondary endpoints, including reduction in the cardiac biomarker NT-proBNP, time to first clinical worsening event, change in peak 6MWD at Week 12, and change in trough 6MWD at week 15. Based on the INCREASE results, the company now plans to submit a supplemental new drug application to expand the Tyvasos label in mid-2020.

In June 2019, the company submitted a 505(B)(1) NDA (new drug application) for Trevyent disposable treprostinil pump system. Although the FDA first accepted the application and set PDUFA (prescription drug user fee act) date as April 27, 2020, the agency later included a mid-cycle information request noting several deficiencies in the Trevyent NDA. While the company has already sent its responses to the FDA, based on recent discussions with the FDA, the company expects a delay in the PDUFA date. The company expects this FDA approval in the next 18 months.

United Therapeutics also expects the launch of ISR (Implantable System for Remodulin) codeveloped with Medtronic (MDT) to be delayed to 2021. The delay of the commercial launch is attributable to Medtronic satisfying various conditions to its PMA approval.

United Therapeutics estimates the prevalence of PAH WHO Group 1 in the U.S. to be more than 45,000. The currently approved PAH drugs are for PAH WHO 1 class patients. According to PHA (Pulmonary Hypertension Association), WHO Group 1 refers to pulmonary arterial hypertension (PAH), which is caused when the arteries in the lungs become narrowed, thickened or stiff. The right side of the heart must work harder to push blood through these narrowed arteries. This extra stress can cause the heart to lose its ability to pump enough blood through the lungs to meet the needs of the rest of the body.

However, the prevalence of PAH WHO Group 3 patients in the U.S is even higher, of around more than 130,000 patients. These patients do not have any FDA approved treatment option. Again, according to PHA, WHO Group 3 includes PH due to chronic lung disease and/or hypoxia (low oxygen levels). These lung diseases include obstructive lung disease where the lung airways narrow and make it harder to exhale (e.g. COPD or emphysema); restrictive lung disease in which the lungs have a tough time expanding when one inhales (e.g. interstitial lung disease or pulmonary fibrosis); sleep apnea, and living in an area of high altitude for a long period of time. Arteries in the lungs tighten so that blood can only go to areas of the lungs that are receiving the most air and oxygen. This tightening leads to high blood pressure throughout the lungs.

United Therapeutics is working to increase its total patient base from around 7,500 to 25,000 in the next five years.

Besides Remodulin, Tyvaso and Orenitram also saw the highest patient demand in 2019 as compared to the last four years.

Then again, United Therapeutics expects RemUnity, Trevyent, ISR, and Smart Pump technology to have a very favorable impact on future patient demand and sales of Remodulin. The company also expects label expansion of Tyvaso based on the INCREASE study to increase the addressable U.S. population by more than 30,000 patients. This will also position the Tyvaso as a treatment option for a section of the PAH WHO Group 3 patients, those with interstitial lung disease. The company is studying Tyvaso in COPD (chronic obstructive pulmonary disorder) patients in the Phase 3 PERFECT study. Finally, the expanded label of Orenitram based on the FREEDOM-EV trial highlighting superior morbidity and mortality outcomes is also helping to attract new PAH patients.

United Therapeutics is now studying Tyvaso in PH WHO Group 3 patients, PH COPD patients, in Phase 3 trial PERFECT. The company seems to have high hopes for the success of the trial after robust results from the INCREASE study since inhaled therapies can avoid the VQ (Ventilation Perfusion Mismatch), as is seen in system therapies targeting lung diseases. The PERFECT trial is currently 20% enrolled.

Besides studying already approved products for additional indications, the company also has a slew of investigational NCEs and biologics in its pipeline.

United Therapeutics expects investigational Phase 3 asset, ralinepag, to transform the care of WHO Group I PH patients. The company is also studying a gene therapy study in the Phase 3 trial, SAPPHIRE, to make PH treatment more convenient with just a once quarterly infusion of genetically engineered autologous stem cells from the patient. The company expects enrollment to be completed in 2021, and product launch by 2025. Finally, the company is attempting its hand at the much challenging and lucrative organ manufacturing segment.

The biggest risk weighing down on United Therapeutics valuation is the potential impact of generic erosion of Remodulin. The company depends extensively on its topline on the treprostinil franchise, exposing it to significant business concentration risk.

The company is exposed to R&D failure risk and subsequent contraction in probable growth drivers. The most recent example of such a failed trial is the phase 2/3 DISTINCT study evaluating Unituxin in Injection added to irinotecan compared to irinotecan or topotecan alone in patients with relapsed or refractory SCLC (small cell lung cancer). On February 3, 2020, the company announced that this trial did not meet its primary endpoint of extending OS (overall survival).

According to finviz, the 12-month consensus target price of the company is $122.22. On February 27, Cowen analyst Chris Shibutani upgraded United Therapeutics from Market Perform to Outperform and raised the price target from $119 to $145. On February 25, Wedbush analyst Liana Moussatos raised her price target from $237 to $243 and reiterated Outperform rating for the stock. On February 13, Credit Suisse analyst Martin Auster reiterated the Outperform rating and raised his price target from $113 to $121. On January 31, JPMorgan analyst Jessica Fye revised upwards United Therapeutics rating from Neutral to Overweight and price target from $116 to $120. On December 27, Oppenheimer analyst Hartaj Singh reiterated the Outperform rating and $155 target price.

We see that the overall analyst sentiment and target price have consistently improved for the company since March 2019.

Based on the companys robust product portfolio, strong pipeline, and multiple upcoming catalysts, I believe that $145 is a fair estimate of the true value of the company. I believe that retail investors with above-average risk appetite should consider buying the company on the latest dip in 2020.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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United Therapeutics: Buy The Dip - Seeking Alpha

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