Martine A. Rothblatt - United Therapeutics Corp..

Evan Seigerman - Barclays Capital, Inc. Mark Connolly - UBS Securities LLC Terence Flynn - Goldman Sachs & Co. Liana Moussatos - Wedbush Securities, Inc. Alethia Young - Credit Suisse Securities (USA) LLC (Broker).

Good morning. My name is Chanel, and I will be your conference operator today. At this time, I would like to welcome everyone to the United Therapeutics Corporation 2017 First Quarter Financial Results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

Remarks today concerning United Therapeutics will include forward-looking statements representing the company's expectations or beliefs regarding future events. The company cautions that these statements involve risks and uncertainties that may cause actual results to differ materially.

Please see the company's latest SEC filings, including Forms 10-K and 10-Q for additional information on these risks and uncertainties. The company assumes no obligation to update forward-looking statements. Today's remarks may also include financial measures that were not prepared in accordance with U.S. generally accepted accounting principles.

Reconciliation of non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found in our earnings release available on our website at www.unither.com.

Finally, please note that today's remarks may include reporting on the progress and results of clinical trials or other developments with respect to the company's products.

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

Anyone seeking information regarding the use of one of the company's products 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. Good morning, everybody. Welcome to United Therapeutics' first quarter 2017 earnings call. My name is Martine Rothblatt. I'm the Chairman and CEO, and I'm joined on the call by our Chief Financial Officer James Edgemond and our Chief Strategy Officer Andrew Fisher, who is also known as our IP guru.

I've got a few introductory remarks, and then we'll open up the lines for questions that can be directed to Andy, James or myself. This past quarter, we saw a continuation of the transient, temporary phenomenon of too few patients coming onto our therapies to offset the loss of our patients to either transplantation or death.

This phenomenon is the result of patients remaining longer on AMBITION therapy than they have in the past, plus some diversion to Uptravi therapy, while duration on our true prostacyclin therapies, which are generally used after an initial challenge with either oral PDE-5 or oral ETRA therapies, has remained largely unchanged.

I say this is a transient and temporary phenomena because the numbers of patients who need to be on our therapy are building up on the AMBITION protocol like an ever-larger backlog, and when they do break through to needing true prostacyclin therapy, which will be in the coming quarters, we expect to see a significant jump in Orenitram, Tyvaso and Remodulin revenues.

Indeed, in the past quarter, the first quarter of this year, we saw for the first time since Uptravi's launch our decline of patients have stopped, stabilized and has begun growing again. So that's a huge good sign of what we can expect to see in the quarters to come.

Now, whether these patients who are now moving onto United Therapeutics' therapies go onto Orenitram first and then Tyvaso, or Tyvaso first and then Remodulin, or straight to Remodulin, this is all simply a consequence of their doctor's judgment as to how much prostacyclin they require and in what form.

It is true that because Orenitram and Remodulin are priced in a dosage fashion, a dosage-sensitive fashion, when they first come on to Orenitram or Remodulin, the average revenues for that patient is going to be a lot lower than when they first go onto Tyvaso, which has a steady dosing prescribed in its label.

But that kind of stuff works itself out within two or three quarters. So to some extent I would say the financial results here seem, in any given quarter, are really an echo of patient trends six months in the past, and that's an important thing to keep in mind.

Meanwhile, we at UT are concentrating on our core long-term interest in curing end-stage lung diseases and this occupies a much greater percent of our attention than the fluctuations in quarterly results because we can see from the trends of patients needing to move off of front-line therapies onto our therapies, the quarterly results are going to get better and better in the coming quarters as more and more patients move onto our therapies.

Meanwhile, we're quite confident that these long-term interests will provide the greatest value yet to shareholders, and indeed, within our internal business plan, our net present value assessment is in excess of $15 billion. And this assessment comes from three segments of our pipeline in addition to our current revenues.

We label these segments our nearer-term pipeline, medium-term pipeline, and longer-term pipeline. So let me say a few words about each of these three pipelines. The nearer-term pipeline covers product launches for the four-year period, 2018 to 2021.

And while there are a number of items in this pipeline, in the interest of time, I'll focus on just the most significant launches in this period, which are a replacement product for all parenteral prostacyclin therapies, called RemoPro, a morbidity-mortality label for Orenitram, and a novel, brand-new oral prostacyclin – oral prostacyclin called Esuberaprost.

These products are expected to double our current level of sales because, first, we believe they will eliminate the two factors that have limited Remodulin acceptance, namely, a kind of Hobson's choice between subcutaneous pain or intravenous delivery. RemoPro will blow that choice out of the water.

Second, we believe they will eliminate the label efficacy distinction between Uptravi and Orenitram. We are shooting for a morbidity-mortality label for Orenitram.

And third, we believe they result in a doubling of duration of time on Tyvaso therapy because of its coupling with Esuberaprost, which has a complementary pharmacokinetic as well as pharmacodynamic profile. So those are the highlights of the short-term pipeline or nearer-term pipeline. Let's now talk about the medium-term pipeline.

This covers product launches for the four-year period, 2022 to 2025. Again, there are numerous products in this pipeline, but I'll just, in the interest time, focus on the most significant.

The most significant ones, I think, are extending Remodulin into idiopathic pulmonary fibrosis via our new EPITOPE [08:45] study, extending Tyvaso into COPD via our new [ph] PERFECT [08:54] study and extending Orenitram into left heart failure via our SOUTHPAW study.

These studies, all Phase 3, extend our therapies into markets that are several times as large as our current markets and thus portend a further doubling of revenues to beyond $5 billion as a result of this medium-term pipeline.

In addition, by this time we expect our oncology products will be nearing $1 billion in sales, especially if the current small cell lung cancer pivotal trial is as successful as all the experts believe it will be. Finally, let me turn to our longer-term pipeline, which covers product launches in the last half of the 2020s.

During this period, we expect to launch a variety of biologic products that will replace failing lung lobes, lungs, kidneys, and hearts. This would be one the most practical steps to extend human longevity.

Even today, we are successfully saving the lives of people with end-stage lung disease by extending the transplantation assessment time of explanted lungs that would otherwise be thrown away through the excess fluid accumulation.

In about a half decade, we will have literally manufactured organs for patients that are excluded from or at risk of dying on the transplant list.

Now, we believe the major risks to this business plan, both the nearer-term, medium-term and longer-term pipeline, can be grouped into categories of generic competition, technology development, and health care reimbursement. So let me say a few words about each of these risk areas.

As for generic competition, we try to stay at least one step ahead technologically. I think the generic companies are good because they keep us ethical companies always trying to move the technology hurdle forward and thereby providing more benefits to more patients.

So for Remodulin, we believe patients, physicians, and payers will overwhelmingly appreciate the benefits of RemoPro, since it should provide freedom from the pain and IV access of current parenteral therapies.

And I think if you had a choice between not having to have the intravenous, not having to suffer through the pain, having to do the IV or the pain would seem kind of, while it would be generic, it would seem kind of barbaric. So our patents on this new RemoPro go well into the 2030s once fully granted.

And we also have new patents on Tyvaso, Orenitram and Esuberaprost, which together with the preexisting patents extend to the late 2020s and beyond. Now, there are also risks in the realm of technology development. There are many uncertainties with drug development and regulatory approvals.

However, we try to mitigate these risks by pursuing multiple, independent studies aiming towards similar markets. We do the best we can with every product and every study, but the inherent risks of technology development and drug development can also be mitigated through an intentional strategy of not putting all of one's eggs in one basket.

So for example, both our INCREASE study, a Phase 3 study of Tyvaso in idiopathic pulmonary fibrosis is complemented by our EPITOPE [13:02] study, which is a study of Remodulin in IPF. So you see there we have two separate shots at goal, helping to mitigate the inherent risks of technology development.

Similarly, both our newly in-license [ph] IBAR [13:20] technology and our soon to be launched [ph] PERFECT [13:24] study are both active in the very large field of COPD. Whether one or the other study succeeds, nobody can be that omniscient to know, but both of them provide us two shots on goal.

With respect to even things like organ manufacturing, we are simultaneously developing both scaffold decellularization as well as scaffold printing technologies, as well as multiple technologies for cell expansion and receullularization.

Ultimately, sometimes people say to me, Martine, what if you have success with more than one of these studies or more than one of these products? And I can't help but smile because I believe that having more than one winner is the ultimate high-class problem.

Let me close with the riff of – that are presented in the realm of health care economics, something which is very much in the news today and kind of seems like it's very much in the news perennially. We always try to do the right thing and trust that this compass heading will fare best in the ever-changing waters of health insurance.

For example, if our patients lack insurance, we provide our medicines for free. We have not increased the price of our best-selling medicine, Remodulin, for more than five years. And we've never increased the price of any of our medicines by more than single digits.

Looking toward the future, we believe that our organ products will save the health care systems many times their cost by avoiding the huge hospitalization expenses associated with end-stage kidney, heart, and lung failure.

At United Therapeutics our tag line is Medicines for Life, and indeed, our pathway is the practical pathway for greater human longevity.

With these introductory remarks covering our financial performance in the past quarter, our pipeline, and our risks, I'd like to ask the operator to now open the phone lines for any questions directed to Andy, James or myself.

Operator?.

Thank you. And our first question comes from the line of Geoff Meacham of Barclays. Your line is now open..

Hi, all. This is Evan, on for Geoff. Thanks for taking the question. Just one about the interim look on the FREEDOM-EV study.

What do you view as a reasonable bar for commercial viability and differentiation versus the competition? And does it matter if a patient is on one or more therapies? So basically, what's the role of combination therapy going forward?.

the prostacyclin pathway, the nitric oxide pathway, the endothelin pathway. Those, of course, have combined across them some 13 approved drugs. But then there's also the thromboxane pathway and the serotonin pathway. And those latter two have had no success.

There were a couple of abortive efforts, one by Boehringer and a couple of others, but they went nowhere. So there is still some kind of a hope for a new silver bullet.

But what I think is going to happen here, Evan, is that we are now entering into the age of pharmacogenomics, and I think we are going to see that pulmonary hypertension is more of a syndrome.

It's more of an indication of an underlying genetic abnormality that expresses itself at different points in a person's life, often as a result of different triggers. And what we're going to be able to see is that some patients are unfortunate enough that they've got genomic dysfunctions in all five pathways.

And for those patients, if you can address all five of them you can keep them alive, but if you can address only three of the five, as is the case with the approved drugs that we have right now, then you're going to slow down the progression of the disease but you're not going to be able to halt it and eventually, unfortunately, the only hope for those patients would be a lung transplant.

There are some patients who they have a dysfunction in only one or two of those pathways, say, just the nitric oxide pathway or just the endothelin pathway. And if that's the case, such a patient can be stabilized for a very long time on just the AMBITION therapy which addresses just those two pathways.

There are some patients who their only real dysfunction is in the prostacyclin pathway, so for those patients you are kind of wasting time treating them with a PDE-5 or an ETRA because what they really need to be given is Orenitram up front as early as possible.

Unfortunately, today, we have no way to know any of this information other than old-fashioned trial and error. And it's a waste of the patient's life. It's a waste of heartbreak for the family. And it's also a waste of resources in the health care system.

And this is why we at United Therapeutics have begun a new policy that all of our new pivotal studies, we put into the protocol that all patients included in the study undergo a genomic sequencing and then we do a follow-up sequencing afterwards looking for transcriptomic factors in particular.

We're hopeful that together with our partners at Human Longevity, Inc., who is responsible for doing the sequences, that we will be able to identify which patients are the strongest responders to our therapies up front.

And we're hopeful that eventually that information can get on the label and that in the next several years as patients' doctors have their genomes up front, they will have the knowledge to know, okay, for this particular lady, she only needs one drug, but this particular patient needs two drugs or three drugs.

So Evan, we're getting there, but it's going to be something for the 2020s rather than the 20-teens..

Great. Thanks for taking the questions..

Sure thing..

Thank you. And our next question comes from the line of Martin Auster of UBS. Your line is now open..

Hi. This is Mark Connolly on for Marty. Thanks for taking my call. So following up with FREEDOM-EV, we noticed in the queue that some approval timelines were adjusted from previous guidance.

And can you comment specifically on FREEDOM-EV, which was pushed to 2020 from 2019 and what that might mean related to the interim analysis planned this summer?.

Yeah, Mark, the guidance we'd give is that we have a group of projects that we call in the nearer-term guideline, in the nearer-term pipeline. And the only guidance that we're providing are that these products which are in the nearer-term pipeline will be launched in the four-year period 2018, 2019, 2020, and 2021.

I don't have the whole list of them, but certainly FREEDOM-EV, which we go by the product name OreniPlus, because it's Orenitram plus background therapy. That's the study design, okay, that's something that will be launched in the 2018 to 2021 pipeline.

And it's just too arbitrary to be able to parse the particular launch timeframe within a quarter or even within the break of an annual year. So with regard to the launch of OreniPlus, that would be nearer-term, sometime between 2018 and 2021..

Okay, great. Thanks for taking my question..

Sure thing, Mark..

Thank you. And our next question comes from the line of Terence Flynn of Goldman Sachs. Your line is now open..

Hi. Thanks for taking the question.

Martine, just based on your pipeline review during your prepared remarks, is it fair to assume that you're content with your pipeline as it currently stands? Or should we expect more collaborations along the lines of the bio-printing agreement? Or would you even perhaps consider any mid-stage clinical assets outside of PAH? Thanks..

Yes, Terence, we're not content. We at United Therapeutics looked at ourselves as like a restless engine, and we are always on the prowl for new opportunities. In fact, we find a lot of companies want to work with us and even would like to be acquired by us because the culture and the atmosphere at UT is so awesome.

I know you're like a big statistics guy, like one stat figure is that the voluntary turnover at United Therapeutics is way less than it is at other biotech companies and pharma companies in our peer group. So people definitely want to be acquired, and we're interested in acquiring new technologies, new therapies.

We're interested in both early-stage assets, such as those that are active in the thromboxane and serotonin pathways. We're interested in more advanced methods of current pathways. During the past quarter, we closed a deal with a terrific company named Respira, who was referred to us by one of the leading pulmonary hypertension physicians, Dr.

Adaani Frost, down in Houston, and we're really excited about this IBAR [26:10] therapy, as I mentioned in my prepared remarks.

In addition, we are – I think we're liked a lot by all of the major banks, including yours, Goldman Sachs, and as a result, the investment banking side of those firms bring to us these beautiful binders that are like at least an inch thick.

And in them are pages upon pages of different companies that would they think could be good opportunities for us to acquire them.

And we are in a very nice situation because we have the best and brightest minds from Goldman and JPMorgan and Wells Fargo and Citibank and what have you, have the best and brightest minds bringing us all of their cool ideas for acquiring companies that would range anywhere from the smaller ones, like I mentioned Respira, up to companies that would require, say, an acquisition price in the $1 billion to $2 billion range.

All of these are fair and interesting game for us, and I see that we are now active in five therapeutic areas. We're active in pulmonology, of course, also now with SOUTHPAW in cardiology, also now with our iron study with – in the field of hematology.

And as well you can see with the 3D Systems deal that we announced we also have some very good activity in transplant science. So all of these different areas have valuations which are generally a little bit more modest than those that you would see in the fifth area, which we're also very keen about, which is oncology.

But as I know you folks know at Goldman, valuations right now are sky high in oncology. So that's not to say that we wouldn't make the right oncology acquisition.

And it would, I think, be a beautiful thing to add to United Therapeutics family of companies, a large acquisition, whether it was revenue generating in the hundreds of millions or just on the cusp, maybe late-stage Phase 3, promising, you know, nevertheless, something that could justify very large valuation.

All of that is very much fair game and within the scope of our M&A dashboards that we operate right now.

Next question?.

Thank you, and our next question comes from Liana Moussatos of Wedbush Technology. Your line is now open..

Thank you for taking my question.

What are the next steps to get the 3D print transplant organs to the market?.

Yeah, Liana, thank you for that question. It's a step-by-step process and what I like about it is that it's now an engineering process. It isn't something that any longer requires fundamental breakthroughs in physics, something that doesn't require new inventions. It requires a step-by-step improvement of the engineering of our current technologies.

So for example, today we have literally an assembly line of porcine lung decellularized scaffolds. And when I say an assembly line, we are decellularizing over 500 scaffolds a year, so that would be, once cellularized, that would increase the supply of lung transplants 25% in the entire country right now.

We also have a parallel assembly line in another lab where we recellularize these scaffolds with allogenic cells, that is with human cells.

So when the final organ is completed, it looks to the patient recipient just like a human lung, even though at its collagen skeleton, if you will, these are proteins that were originated in the – by instructions from a pig's DNA. Over time they will get completely replaced by human DNA-directed collagen. It will be a completely human lung.

So these same technologies of scaffold management and recellularization of these scaffolds are exactly the same technologies that will apply to the 3D printed scaffold. Of course the great benefit of the 3D printed scaffold is that we can make these in any size and shape that is necessary for different patients' chest size.

And another great benefit is that we can scale up the number of scaffolds far greater than we can do with the porcine decellularization process. And finally, it looks like it will be much less expensive as well. So the process is to begin printing the scaffolds with our partners at 3D Systems, basically branch by branch.

There are, roughly speaking, 15 to 20 branches of vessels and airways in the human lung. So we print these branch by branch. They go down to finer and finer resolutions. As we're printing them in parallel, we are cellularizing them.

And when we cellularize the reprinted branches, just as when we recellularize the decellularized scaffolds, we test for gas exchange. And in fact, it's a magical thing, Liana, to watch.

We hook up the scaffolds to, basically, a kind of an ECMO machine, and the scaffolds themselves breathe in the cells that they're being recellularized with until finally, in this little bioreactor, the lungs are able to breathe on their own. And it's virtually an embryonic type of process.

So it is the – the step is going through the xeno process with the de-cell/re-cell while the 3D folks are building up their 3D printing and then mapping over our recellularization technology from the de-cell/re-cell onto the 3D printing.

Finally, on yet a third parallel track, there's some remarkable work being done with successfully teasing out precise cell lines from IPF cells. And the types of cell lines that we're most interested in differ by organ. For the lung there are different types of epithelial cells and a general family of endothelial cells to the predominant cell lines.

We at UT have mastered the technology to expand these cells now into the tens of billions of cells and which is, by the way, the amount that you need to recellularize an organ.

So the IPF cell development activity at UT will ultimately be mapped onto the 3D Systems-printed scaffold so that rather than having a scaffold recellularized with allogenic cells, as we're doing today and as we would do as an interim step, the 3D scaffold will be cellularized by the intended patient's own cells.

And that means, of course, that patient will not be obligated to take any immunosuppressants, which is the major factor keeping most people off of transplant lists. It will be a huge benefit to the patients and to the health care system as well.

Now, there will always be people who cannot wait to have a 3D-printed lung, cannot wait to have their IPF cells expanded and regenerated. We have a lot of interest from, for example, people who are in first-responder type of situations, military type of situations, acute lung injury type of situations, where what you need is a very rapid transplant.

And in those situations, the work in our xenotransplantation group is a perfect solution.

We plan to move organ transplantation from a paradigm of scarcity where it is right now with a viciously managed transplant list that keeps 99% of the people in need of an organ off the list, to a paradigm of abundance in which organs can be constantly produced and available for people who need them as a result of car accidents or fire or other trauma, as well as having those custom designed for patients that can wait two or three months for their transplant.

So I believe there is enough demand, Liana, for all of these different organ transplantation technologies we're developing. And I really look forward in the 2020s to our biological products being a harbinger of a paradigm of abundance in the field of transplantation science..

Thank you..

Thank you. And our next question comes from the line of Alethia Young of Credit Suisse. Your line is now open..

Hey, thanks for taking my question. Just one on the timing of how you're thinking about when revenues might return back to some of the advanced therapies.

I know if you look at AMBITION it seems like kind of the rate in which people had events was very slow in the combination arm, so I just wondered if you could talk about maybe what you're seeing in the real world and how that applies to your business maybe over the rest of this year. Thanks..

Sure, I'm glad to. And this will be the last question, operator. So it's not a kind of a thing that you can be super precise about because we're in the realm of human affairs and there's thousands of patients on these AMBITION therapies.

But what can be said, largely because we're dealing with relatively large numbers of people, is that about 15%, say one out of every seven patients or so, who are on combination therapies experience a morbidity or mortality event each year.

Now, that does not ipso facto automatically mean that the patient is going to be immediately moved onto an advanced therapy.

I think in the best case, at the largest treatment hospitals, that would ordinarily be what one would do, because it definitely is a bad sign to be suffering these morbidity events, which are things like requiring hospitalization, dropping in New York Heart Association functional class, significant decrement in six-minute walk distance, or significant deterioration in cardio-hemodynamics.

But there are thousands of patients with PAH. They're seen all over the country. Many people live in rural areas. Not everybody can, like, get switched to a new therapy right away. So in real life, sometimes the rate of patients moving onto the more advanced therapies may be a little bit slower.

On the other hand, in clinical trials, patients are monitored very intensively and are basically under a kind of, I would say, a subliminal encouragement to remain on therapy, whereas, what's usually the case in the real world is patients do worse on therapies than they do in clinical trials.

So that's a factor kind of tending to move patients more to our therapies more rapidly. I have a chart that was prepared for me. It was very interesting. It showed that from the launch of Uptravi the number of patients on United Therapeutics declined gradually, a small slope, but declining until the fourth quarter of last year when it flattened.

And then the first quarter this year, it's an upward slope. So obviously, as a CEO of a company, I'm happy to see that more patients are clearly coming onto our therapies and that was had been a temporary decline in the history of our company since the launch of Uptravi has pretty clearly been reversed.

Now, I've heard there was just a big International Society of Heart and Lung meeting in San Diego, and staff came back and told me that the reports from physicians are that Uptravi is not working as well as they thought. Well, as I mentioned, it's usually the case that in the real world, things don't perform as well as they do in a clinical trial.

Some people were referring to it as prostacyclin-lite, like L-I-T-E. I mean, that could be just a – that could be a good and a bad thing because prostacyclin does have side effects. And perhaps it's good to have something with lighter side effects. But if you need prostacyclin therapy, it's maybe not the time to have a lite one.

It's the one time to have the real one. And so I think these are the kind of factors that are underlying this bottoming out and then upturn in the number of patients on our therapies. Whether the revenues will reflect that within one quarter or two quarters lag, it's really, really hard to predict.

Remodulin and Orenitram in particular, patients start at low doses because of this side effect profile I mentioned and ramp up gradually. So you're always going to see a several-month lag between patients and revenue, patient growth and revenue growth, uptick. For Tyvaso, there is less of a lag.

There is some argument that the patients are basically holding on to the orals too long and then they need to go directly to Remodulin. And we're really agnostic. All of our sales reps know that their job is to educate physicians on Orenitram, Tyvaso, and Remodulin.

Once patients are on their therapeutically ideal dose, we are really revenue-agnostic in terms of whether they're on Orenitram, Tyvaso, Remodulin. All three of those drugs were designed to be pretty much priced equivalent to each other because they all have the same active pharmaceutical ingredient.

So the bottom line is that the prospects for UT are super good. There's never been a larger backlog of patients who require our therapies, and therefore the prospects for continued growth and significant revenue growth across all three of our therapies have never been better. Thank you very much. Operator, you can conclude the call now..

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