Martine A. Rothblatt - Founder, Chairman and Chief Executive Officer Roger A. Jeffs - President, Chief Operating Officer and Director John M. Ferrari - Chief Financial Officer, Principal Accounting Officer and Treasurer Andrew Fisher -.

Liana Moussatos - Wedbush Securities Inc., Research Division Philip Nadeau - Cowen and Company, LLC, Research Division Salim Syed - ISI Group Inc., Research Division Irene Lau - Goldman Sachs Group Inc., Research Division Evan Seigerman John Chung - RBC Capital Markets, LLC, Research Division.

Good morning. My name is Kevin, and I'll be your conference operator today. At this time, I would like to welcome everyone to United Therapeutics Corporation's Third Quarter 2014 Financial Results Conference Call.

[Operator Instructions] Remarks today concerning United Therapeutics Corporation will include forward-looking statements, representing the company's expectations or beliefs regarding future events.

The company cautions that such statements involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements. Please see the company's latest forms 10-K and 10-Q and subsequent filings with the SEC for additional information on these risks and uncertainties.

There can be no assurance that these actual results, events or developments referenced in these statements will occur or be realized. The company assumes no obligation to update forward-looking statements to reflect actual results, new information or changes in underlying assumptions.

Today's remarks are intended to educate investors about the company. This may include reporting on the progress of results of the clinical trials or other developments with respect to the company's products.

Today's remarks are not intended to promote the company's products, to suggest that they are safe and effective for any other use than what is consistent with the FDA-approved labeling or to provide all available information regarding the products, their risks or related clinical trials.

Anyone seeking information regarding the use of -- the use of any of the company's product should consult the full prescribing information for the product available on the company's website at www.unither.com. Thank you, Dr. Rothblatt. You may begin your conference..

Thank you, operator. And good morning or afternoon to everybody listening in for the United Therapeutics' Third Quarter 2014 Financial Results. My name is Martine Rothblatt. I'm the Chairman and CEO. And I'm joined on the conference call this morning by Dr. Roger Jeffs, our President and Chief Operating Officer; and also by Mr.

John Ferrari, our Chief Financial Officer; and last, but not least, by Mr. Andrew Fisher, our Chief Strategy Officer. So as I complete a few introductory remarks, I'll open up the lines for any questions, and the questions will be answered by either Roger, John, Andy or myself, depending on who's got the most expertise in that area.

So we're very pleased with the results this third quarter. I think that there are a couple of areas I'd like to give some introductory comments on before opening up the line for questions. The first is the GAAP loss of $25 million compared to the non-GAAP profit of a much larger amount listed here in the company's press release as some $207.9 million.

So that requires a bit of explanation. Now the reason for this is completely, or overwhelmingly, I'd say, an artifact of the GAAP treatment for how we account for our non-dilutive share tracking awards, which we issue to the employees of the company as a bonus compensation. Now most companies issue dilutive stock options.

And the way the GAAP rules require dilutive stock options to be accounted for is that they are priced at issuance, in accordance with their Black-Scholes value, and that price is an expense in that period, which is, to some extent or another, amortized over time.

But when you issue non-dilutive share tracking awards, which is what we do here at United Therapeutics, the accounting rules require those non-diluted share tracking awards to be repriced every quarter in accordance with the growth or fall of the company's stock price.

As most of the people know listening in on the conference call, United Therapeutic's stock price has continued a very nice ascent during the third quarter. And as a result, these legacy share tracking awards need to be marked to the new price of our company's stock despite the fact that about half or more of them are issued more than 2 years ago.

So they're pretty old. So that -- it's kind of funny that something which, ordinarily, people would think of as more in the interest of shareholders, namely non-dilutive equity for employees, gets accounted for in a GAAP sense, in a way that kind of looks worse, resulting in this GAAP loss.

But that's actually the -- one of the main reasons why we always report non-GAAP earnings as well because the non-GAAP number gives you a vastly more insightful, I think, look at the company's overall earnings.

Because you can see that with almost $208 million in earnings for the third quarter, our earnings are up about 25% year-over-year from the third quarter of 2013. So absolutely fantastic growth in the non-GAAP earnings, and I hope this discussion I just shared with you will provide some insight on why it's so different from the GAAP loss.

The second thing I'd like to bring everybody's attention to are the very nice year-over-year revenues for the quarter being up almost 10% compared to the third quarter of 2013. There are nice increases in Remodulin, Adcirca and Orenitram.

Tyvaso is flat quarter-over-quarter, but we have frequently seen this with the Tyvaso being one of the more lumpy of our drugs quarter-to-quarter.

I think a lot of it has to do with -- there's a fair amount of training and education, which is necessary to bring patients in on Tyvaso and hence, the revenues depend quite a bit on the schedule to which doctors can see their patients. The third quarter, of course, transcends the summer period, during which many people on vacation.

Just to give you little bit of granularity on that. To bring the patient on Tyvaso and have them remain on Tyvaso, it's necessary to teach them how to use a nebulizer. And a nebulizer is very different from something like an asthma inhaler, which many of you may have some experience with.

It's something that you will have to learn how to breathe just so 9 breaths within 2 minutes, 4 times a day. It's a skill. And in the early years of Tyvaso's launch, many patients were kind of, perhaps, not fully as exhaustively trained on Tyvaso as would have been ideal and experienced quite a bit of coughing.

And as a result, the mean duration of patients on Tyvaso was dropping to around only maybe 15 months or so. However, through the great efforts of the medical community and our own team of nurse specialists and so on, we've really emphasized the need to take it slow and take it easy and ramp the people on Tyvaso only after they've been well trained.

And as a result, I'm really excited to announce that our mean duration on Tyvaso is now up to 20 months, which is a really significant improvement. And I think augurs extremely well for the long-term future of Tyvaso. There's also good news for the other products, Remodulin.

I don't know if any of you are or planning to be in attendance at the chest meeting over in Texas.

But there is a data that's going to be presented for the delivery trial, which is the real first public presentation that Medtronic has consented to for the clinical data from the study that will allow us to register Medtronic's implantable pump for Remodulin. I think that data is pretty exciting.

It will be presented, I understand, by the lead investigator, Dr. Bob Bourge, from University of Alabama Birmingham. And there's also exciting news on Adcirca.

Many of you may be aware that there was an announcement since our last quarterly call of the results of the AMBITION trial conducted by Gilead and Glaxo, in which Adcirca and Letairis demonstrated a significant improvement in delaying the time to clinical worsening from pulmonary hypertension.

And this is really quite a striking data that was announced. And most people that -- of the key opinions leader on pulmonary hypertension I've spoken with expect there to be alterations in the consensus treatment guidelines coming out that would favorably present Adcirca and Letairis as front-line therapy.

And then last, but not least, Orenitram, very excited to see some double-digit millions for first full quarter here. I do believe that -- as mentioned in my quotation, that this is just the very beginning of the momentum, Orenitram. I believe that, in fact, we'll be on a $100 million a year revenue run rate by the first quarter of 2015.

It will be going from the double-digit millions to triple-digit millions in pretty short time period. And then from all we can see from the market take-up of Orenitram, that this $100 million a year revenue run rate will continue to grow up towards a $1 billion in peak revenues for that product.

So with those introductory remarks, operator, if you could please open the lines for any questions.

Operator, are you still available?.

[Operator Instructions] Our first question comes from Liana Moussatos with the Wedbush Securities..

Can you give us an update on the status of some pipeline products like the antibody from neuroblastoma and the x U.S.

Remodulin launches and maybe beraprost?.

Sure. Thank you very much for your question, Liana. Most of those products are directly managed by Dr. Jeffs. So Roger, if you can please walk through them..

Yes. Thank you, Martine, and thanks for the question, Liana. So a couple of exciting things are going to happen in the fourth quarter. So the 1418, the chimeric monoclonal antibody for neuroblastoma, the action date for that is in December.

We've continued to have very, very good discourse with the agency about that following in our manufacturing of the antibody and we remain optimistic for a positive outcome in the U.S. in the fourth quarter.

Another exciting thing in the fourth quarter for United Therapeutics is that in concert with Medtronic, we plan to file the implantable infusion system for Remodulin. So Medtronic is coordinating the PMA filing, and we will coordinate a labeling supplement for the use of Remodulin with the implantable SynchroMed II pump.

So those are the -- sort of the nearest term, I'd say, binary news events that we're going to have in the fourth quarter. In terms of rest of world revenues, as everybody knows, we have approval now in China and Japan.

We're just in a very, almost immediate term in terms of getting reimbursement and pricing for those therapies, both in China, which is not government-reimbursed but insurance privately paid, and then in Japan, where pricing has just been announced and the product will be on the market in November.

We've just actually shipped product to our partner, Mochida, in Japan. So while we think there will be a slow buildup of revenues in the near term from the Asian markets, I think, over time, it will significantly contribute to the rest of world Remodulin sales that exist. So those are some of our near-term pipeline and revenue opportunities.

We also are advancing many of our other core programs. So probably the one most of interest to these callers on the phone is our FREEDOM-EV study. So enrollment is progressing at a very nice clip.

We have over 100 centers internationally participating in that trial, and we feel our results to date are consistent with what we've seen from other studies in terms of rates of progression of disease in patients in the study from an overall and blinded standpoint, at least.

So we're happy with that, and we certainly are paying close attention to the quality of study and the quality of patients that are enrolled so that we can give ourselves the best chance of a successful outcome. We are also -- we've completed the first cohort of 3 patients with our cell therapy program.

That's an opportunity that we developed a license from Pluristem, that's using PLX-PAD sales for patients with pulmonary arterial hypertension that basically are mesenchymal stem cell.

We're in an early Phase I safety study in Australia where we've given 0.5 million cells per kilogram to the first 3 cohorts of patients and are now recruiting actively the second cohort of patients where we'll double that load. That is progressing in concert with IND-enabling studies. So we're still trying to progress in IND in the U.S.

in 2015, either for an intravenous delivery of the cells like we're doing in Australia currently, or through an intramuscular delivery of the cells, which is the way that Pluristem has given it to their patients, in-patient trials within patients with peripheral vascular disease. So there's a lot of toxicology support and IND filing already.

And maybe Martine, if you'd like to give an update on the BEAT study progress?.

Yes. Sure, Roger. The -- that's a Phase III study in which we are combining Tyvaso, together with oral beraprost 314d, and it's about 20% enrolled now and continuing to move forward..

Our next question comes from Phil Nadeau with Cowen and Company..

Martine, I was wondering if you could talk a bit more about the Orenitram launch.

In particular, just wondering who are the patients that are starting therapy? Are they coming from Tyvaso? Or are they naive to treprostinil? And also, how are they using Orenitram? Is it twice a day, 3 times a day? And is there any kind of initial feedback on tolerability in clinical practice?.

Yes, thanks for the question. The answer is sort of all of the above, where they're coming a little bit from Tyvaso, a little bit from Remodulin and de novo, from patients that are not previously on any form of treprostinil. There's dosing BID, but also dosing TID, and I think the trend line is moving rather sharply in favor of TID.

I think that the great beauty of Orenitram is that it can be titrated in so many different steps that, that has really militated against a significant problem of the dosage nature that you referred to. So I've not heard of that being any sort of significant problem at all..

Our next question comes from Mark Schoenebaum with ISI Group..

Martine, this is Salim in for Mark. Couple more questions, just on Orenitram. What are you seeing patients being dosed up to right now in terms of milligrams? And then also, how quickly is that titration curve and inventory for Orenitram as well? How much inventory is in the number for 3Q?..

Yes. Thanks, Salim, nice to hear your voice. The dosing is, as noted in response to the previous question, it's extremely variable.

And I think this is, perhaps, one of the real core strengths of Orenitram and, indeed, of treprostinil in general is that you can almost like analogically, analog sense, dial-up and dial down the dose with great deal of flexibility.

I would probably endeavor to guess that maybe the most titratable way of treating pulmonary hypertension when you consider not only the amount of milligrams or nanogram per kilogram that you can give to the patients, but also all of the different dose formulation. So that titratability is a huge strength.

It also makes it a little bit of a mathematical exercise to address what kind of doses are patients in track receiving. What we're seeing right now is that if you were to convert the milligrams into dollars, the average patient looks like they will be generating approximately $250,000 per year based on a TID dosing. And that -- it's early days still.

But I think that's kind of like where it's leveling out. As with Remodulin, there are some patients that are on teeny tiny doses of Remodulin. There'll be some patients on teeny tiny doses of Orenitram. There are some patients that are on whopping doses of Remodulin. There'll be some patients on whopping doses of Orenitram.

But again, the beauty of this drug is that it is something that the doctor can titrate and, of course, much more easily PO than intravenously. I think the number is a good number.

I don't think there's any unusual stocking or inventory in the numbers, so it reflects, as I had mentioned, the fact that we've got several hundred patients now on Orenitram. I think that we will crack 500 patients before the end of the year and that we will be on a revenue run rate of $100 million per year by the first quarter of next year..

Our next question comes from Terence Flynn with Goldman Sachs..

Irene in for Terence. On Orenitram COGS, it looks like it's around 27% this quarter.

Can you maybe give some color around that?.

Yes, thanks for your question. I'm going to ask our Chief Financial Officer to address the COGS on Orenitram a little bit more with a little more granularity..

Okay. Thanks, Martine. The COGS number for Orenitram is high, and it's very similar to what we saw for Tyvaso and Remodulin in the early stages of a launch, where the revenue level is just not there to support what you typically see as a 12% cost of goods ratio margin on the products.

As a -- because we're doing a lot of manufacturing, we're just -- we just moved our people over from R&D to classification now to commercial, since the drug got approved. So over time, as the revenue builds up and the number of patients increases, the expectation is that we'll -- the cost of goods will be in line with the -- our other products..

[Operator Instructions] Our next question comes from Robyn Karnauskas with Deutsche Bank..

This is Evan Seigerman on for Robyn. A quick question on Remodulin patent case.

Can you help us understand why the judge found that the patent was valid but did not infringe on the Sandoz -- was not infringed by Sandoz?.

I think you're referring -- thanks for the question. I think you're referring to the 007....

You've got it..

Patent and -- whereas our double -- 117, it was, I don't know, even stronger results for UT. But fortunately, we have our IP guru and Chief Strategy Officer, Andy Fisher, on the line to answer your call -- answer your question..

Sure. Thanks, Martine, and thanks for the question. So just to review real quick. There were 2 patents involved in the Sandoz case, as Martine just highlighted. We had the 117 patent, which is a product-by-process patent. The district court found that, that patent was both valid and would be infringed by Sandoz. That patent expires in October 2017.

The other patent, what we call the 007 patent, related to the use of a certain type of diluent with Remodulin. That patent expires in 2029. The court held that, that patent was valid but found that it would not be infringed by Sandoz as a proposed version of generic treprostinil.

The best way to probably understand the court's rationale, it is 100-plus page opinion by the court, so digesting the portions relevant to the 007 patent are probably the best way to get a comprehensive understanding of the court's views on that infringement issue for that patent.

But I guess to sum it up, Sandoz's argument was that they don't intend to make any mention of the use of that diluent in their label for their generic product.

And the court found that compelling and found that the fact that Sandoz would not be recommending the use of the diluent for their product, that they would not be sort of inducing the infringement of the 007 patent. So that issue, along with the issues that were decided in our favor, are all now the subject of an appeal before the federal circuit..

Great.

And is that really crucial for the drug, this aspect that you're describing?.

We believe that the use of that diluent contributes to the safer administration of the drug, yes..

Our next question comes from Michael Yee with RBC..

This is John on behalf of Michael Yee. As we look at the launch of Orenitram in terms of sales, it looks very similar to the launch of Tyvaso.

So is that what you're also seeing as well, maybe in terms of the patient uptake? And what else do you think are similar or different as you compare the launch of Orenitram with the launch of Tyvaso? And then lastly, going forward, you mentioned that you expect Orenitram to be on track to $1 billion.

So do you think Orenitram's launch will outpace Tyvaso's launch?.

Yes. So thanks for the question. We actually see Orenitram launching more aggressively than Tyvaso with a faster take-up. To give you kind of a frame of reference -- and this very much is in line, I think, with the pharmaceutical industry experience in different methods of drug administrations.

The -- it took us about 10 years to get to around $400 million in revenue for Remodulin, which is, of course, delivered parenterally. It took us about 5 years to get to around $400 million a year in revenue on Tyvaso.

And based on the current growth trajectory, I think that we will be somewhere in the 2- to 3-year time period to achieve that level of revenues on Orenitram.

So it is much more -- it's being taken up much more rapidly, and this is simply for the obvious fact that it's much easier to take a pill than to do a nebulization, easier to do a nebulization than it is to put up with an indwelling catheter.

And therefore, when larger and larger populations of doctors look at what to give for their patient, the doctors who represent, say, half of the pulmonary hypertension patients but may represent only about 5 or 10 patients per doctor, those doctors are going to have pause to manage a patient on a complicated therapy but would be more willing to manage the patient on an oral therapy.

Now in terms of the growth trajectory upwards, up toward a $1 billion, that would represent something like 4,000 patients on Orenitram at the average revenue figures that I gave previously. Well, we are just about at that number already with Remodulin and with Tyvaso.

So if you're going to get 4,000 patients on the parenteral system or on the nebulize system, it's pretty clear you're going to get to that same level of patients on an oral system.

Now if you take a look at the addressable market to say, "Well, are these going to be Remodulin patients who would've -- who have disappeared and instead become Orenitram patients?" I don't think you can make that conclusion either.

There are, right now, upwards of 30,000 patients being treated for pulmonary hypertension and diagnosed and given prescriptions.

So out of those 30,000 patients, we know from data that has been gathered in a registry sponsored by Actelion that over half the patients die of their pulmonary hypertension before ever gaining any access to a prostacyclin-based therapy.

So that's an additional 15,000 patients right there from whom we would access -- if we access just 25%, we would get that $1 billion peak revenue. So I think getting a 25% share of the prostacyclin-naive patients is, I think, a very realistic and reasonable goal indeed.

Now on top of that, due to the great efforts of all of our colleagues in the pulmonary hypertension community, the total number of pulmonary hypertension patients has now begun increasing because, really, for the first time, just within the past 2 or 3 years, the number of patients who passed away each year due to pulmonary hypertension, because of the mean survival of the disease, is now less than the annual incidence of pulmonary hypertension.

So that means that the total prevalence, total number of patients is actually increasing each year. And if you run the statistics, it depends on your assumptions for mean survival. But it could be that -- I believe about 10% growth in the prevalence each year is what we should expect for the next 10 or so years going forward.

And so that all goes for a yet greater population of patients on Orenitram. So all of these things, I think, lead to say that the experience of Orenitram is going to be faster to $400 million than it was for Remodulin and Tyvaso and is going to be quite a bit more than the level of revenues ever achieved by Remodulin and Tyvaso.

Thanks for your questions. So we've completed our half-hour allotted time here. To wrap up, we're very pleased with the quarter. The GAAP loss is an artifact of our decision to reward employees in a non-dilutive manner with share tracking awards.

By the way, even the quantity of our share tracking awards are less than the 5% annual threshold that is -- it changes year-to-year, but it's approximately in that neighborhood recommended by shareholder interest groups, such as IFS and so on. So the GAAP loss is an accounting artifact in that regard.

The non-GAAP number, really excited to see that grow by about 25% on a year-over-year revenue growth of about 10%. Thanks to Liana's good question, we were able to highlight the significant pipeline of new and exciting products, including an approval we're hoping for before the end of this year.

I think I want to thank all of you for your time on the conference call this morning. And I believe the next health care conference we're speaking at will be JPMorgan in San Francisco, and the entire team will be there. We hope to see you there. Thank you very much. Operator, you can wrap up the call..

Thank you for participating in today's United Therapeutics Corporation's conference call. This call will be available for replay beginning at 8:30 a.m. Eastern through 11:59 p.m. Eastern on Tuesday, November 4. The conference ID number for the replay is 11694570. The number to dial for the replay is (855) 859-2056 or (404) 537-3406..