Description
(This is my first VIC post, FYI)
Background:
United Therapeutics is a midcap orphan disease biotechnology company. The CEO founded the company to develop treatments for her daughter who suffers from pulmonary arterial hypertension (PAH). Over the past two decades the company has grown to ~$1.5B of revenues with 30% net margins and a large cash balance. The company is in the midst of patent cliffs for its main drugs and the valuation has compressed around this period of uncertainty ($4.6B).
Thesis:
Limited downside. The company currently has $32/share in cash and a runrate EPS of $12/share (~6x P/E ex-cash). Even if the current business were to significantly decline (as bears expect) the company would remain profitable on the rest of its business. Thus, the market is paying a reasonable multiple on out-year bear earnings of $4/share (<20x ex-cash).
Business is actually stable. Bears have believed that the largest drug would collapse with generic competition. Generic competition began in April 2019 and the company suffered modest declines in 2019 and is guiding to growth in the franchise in 2020. While I do not have any view on growth, I do think the market continues to value the business for significant declines.
Tyvaso data creates durability to business. Earlier this year the company reported positive data for another drug that should add material revenues starting in 2021. Thus, even if Remodulin were to collapse the total revenues may stay relatively stable going forward.
Pipeline has value. There is a second trial for Tyvaso that addresses an even larger population. If that were to read out positive (no view), it could conceivably drive growth for the company. While I ascribe no value to the rest of the pipeline, there are some assets that could surprise.
Capital allocation has optionality. The CEO has been a frugal allocator of capital over time and generally done good deals. She is sitting on ~$1.5B of cash that could create value simply from convincing the market of a terminal value.
Payback period is short. Even if bears are unwilling to pay for terminal value, if the company were to maintain earnings >$10 it would earn its entire market cap before the remaining drugs lose exclusivity.
Risks:
Business rapidly declines. There is no visibility into the market and the decline could simply be delayed.
Tyvaso expansion is not approved. The data have only been released in a press release. It is possible that there are issues and the FDA does not approve.
RemainCo faces further pressure. While the rest of the drugs remain on patent, they could face their own issues from pricing or competition in the market.
Capital allocation destroys value. 1/3rd of the market cap is in cash, so poor allocation could destroy material value.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Stable 1Q results next week. If they can prove durability the valuation should continue to improve.
Detailed data on Tyvaso trial. If those look compelling, the market should start to ascribe material revenues in 2021 and beyond.
Business development. If the CEO were decide to allocate capital it will be a focal point for determining terminal value.