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UNITED THERAPEUTICS CORP – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and related notes to our consolidated financial statements. All statements in this filing are made as of the date this Report is filed with theU.S. Securities and Exchange Commission (SEC). We undertake no obligation to publicly update or revise these statements, whether as a result of new information, future events, or otherwise. The following Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Report contain forward-looking statements made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934 (the Exchange Act) and the Private Securities Litigation Reform Act of 1995. These statements, which are based on our beliefs and expectations about future outcomes and on information available to us through the date this Report on Form 10-K is filed with theSEC , include, among others, statements related to the following:
•The potential impact of the COVID-19 pandemic on our business, results of
operations, liquidity, and operations, and our ability to mitigate this
potential impact;
•Expectations of revenues, expenses, profitability, and cash flows, including anticipated growth in Tyvaso revenues as a result of the expansion of its label to include pulmonary hypertension associated with interstitial lung disease (PH-ILD);
•The sufficiency of our cash on hand to support operations;
•Our ability to obtain financing on terms favorable to us or at all;
•Our ability to obtain and maintain domestic and international regulatory
approvals;
•Our ability to maintain attractive pricing for our products, in light of
increasing competition, including from generic products, and pressure from
government and other payers to decrease the costs associated with healthcare;
•The expected volume and timing of sales of our commercial products, as well as
potential future commercial products, including the anticipated effect of
various research and development efforts on sales of these products;
•The timing and outcome of clinical studies, other research and development efforts, and related regulatory filings and approvals, including our pending new drug application (NDA) for Tyvaso DPI;
•The outcome of pending and potential future legal and regulatory actions by the
FDA and other regulatory and government enforcement agencies, and the
anticipated duration of regulatory exclusivity for our products;
•The timing and outcome of ongoing litigation, including the lawsuit filed against us bySandoz, Inc. (Sandoz) andLiquidia PAH, LLC (formerly known asRareGen, LLC ) (RareGen); the lawsuit filed against us by MSP Recovery; our patent litigation with Liquidia Technologies, Inc. (Liquidia) related to its NDA for Yutrepia, and with ANI Pharmaceuticals, Inc. (ANI) related to its abbreviated new drug application (ANDA) seeking FDA approval to market a generic version of Orenitram; and our litigation with theU.S. Department of Health and Human Services (HHS) and theU.S. Health Resource Services Administration (HRSA) related to thePublic Health Service's 340B drug pricing program (the 340B program); •The impact of competing therapies on sales of our commercial products and the amount of inventory of our products that will expire unsold, including the impact of generic versions of Adcirca and Remodulin; established therapies such as Uptravi; and newly-developed therapies such as Yutrepia; •The expectation that we will be able to manufacture sufficient quantities and maintain adequate inventories of our commercial products, through both our in-house manufacturing capabilities and third-party manufacturing sites, and our ability to obtain and maintain related approvals by the FDA and other regulatory agencies; •The adequacy of our intellectual property protection and the validity and expiration dates of the patents we own or license, as well as the regulatory exclusivity periods for our products;
•The effect of our recent conversion to a
(PBC);
•Any statements that include the words "believe," "seek," "expect,"
"anticipate," "forecast," "project," "intend," "estimate," "should," "could,"
"may," "will," "plan," or similar expressions; and
•Other statements contained or incorporated by reference in this Report that are
not historical facts.
We caution you that these statements are not guarantees of future performance and are subject to numerous evolving risks and uncertainties that we may not be able to accurately predict or assess, and that may cause our actual results to differ materially from anticipated results, including the risks and uncertainties we describe in Part I, Item 1A-Risk Factors of this Report and factors described in other cautionary statements, cautionary language, and risk factors set forth in our other filings with theSEC .
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Impact of COVID-19 on our Business
As the COVID-19 pandemic enters its third year, we remain focused on the health and well-being of our patients and our employees, whom we refer to as Unitherians, while maintaining business continuity. It remains difficult to predict what impact this pandemic, and the associated economic impacts, will ultimately have on our business, particularly as new variants, such as Delta and Omicron, continue to emerge. Our financial position is strong. We continue to believe our healthy balance sheet makes us well-positioned to endure the impact of this pandemic. With enough cash, cash equivalents, and marketable securities on hand to fund our operations as we conduct them today for at least two years regardless of our future revenues, we are able to retain and hire new Unitherians, continue our research and development and commercial activities, subject to the limitations described below, and make new strategic investments.
We have an ample supply of our products. The COVID-19 pandemic has placed
significant strains on the supply chain for pharmaceutical and medical device
manufacturers. However, so far we have managed to avoid any material supply
disruption as a result of our long-standing inventory policies and supply
redundancies.
In the case of our treprostinil-based products, and in accordance with our long-standing inventory policy, we have sufficient inventory of finished treprostinil-based drug products (Tyvaso, Remodulin, and Orenitram) to supply the market for at least two years at current levels of demand. In addition, we manufacture our own treprostinil active pharmaceutical ingredient (API) at ourSilver Spring, Maryland facility and have three years' worth of treprostinil API on hand at any given time, as well as a substantial inventory of the key raw material necessary to manufacture it. These products and API supplies are all stored at our own warehouses inthe United States . Manufacturing of our treprostinil-based products, both internally and at our contract manufacturers, continues mostly as usual, and we do not currently anticipate any supply shortages of our treprostinil-based products. We also maintain a significant amount of inventory of Unituxin drug supply and raw materials for additional production, and intend to continue manufacturing Unituxin in quantities sufficient to meet current patient demand. Unlike our treprostinil-based products, Unituxin is a biologic with a shorter shelf life, so our ability to maintain longer-term inventories is limited. Therefore, supply-chain disruptions are more likely to cause a disruption of Unituxin availability than our treprostinil-based products. In addition, COVID-19 vaccine production has had a greater adverse impact on the availability of supplies used in Unituxin manufacturing, as compared to our treprostinil-based products. We have redundant qualified manufacturing sites for our two current best-selling products: Tyvaso and Remodulin. Should either site be impacted by an outbreak, production activities could be diverted to the other qualified site, each of which is capable of supplying the worldwide market. Our internal manufacturing and packaging operations are independently staffed and physically segregated by technical capability (e.g., oral solid dose, aseptic vial filling, etc.). If any internal operation is impacted by an outbreak, we believe that area and staff could shut down and isolate, respectively, without affecting the other manufacturing areas.
To date, we have not experienced any interruption of our supply of drug products
and devices needed to support our ongoing clinical trials.
Distribution of drug product to patients continues without interruption. Specialty pharmacy distributors, which we require to maintain at least 30 days' worth of inventory on hand at any given time, continue to ship our products to patients and hospitals. Specialty pharmacies have assured us that they have exercised their business continuity plans to avoid supply disruptions. They have also assured us that their nursing support services, which are required for therapy initiation and over the course of treatment to train patients to safely administer their medicine, continue through a combination of in-person and virtual visits. Similarly, we are not aware of any disruption to the distribution of Unituxin treatment for patients with neuroblastoma. We have a contingency plan in place to secure alternative product transportation capability to deliver our products to distributors in the event traditional freight operations are disrupted. Our commercialization efforts remain flexible. At the start of the pandemic, our field-based commercial teams were only able to meet with physicians virtually. In addition, it became more difficult for patients to begin our therapies due to the inability of patients to visit their physician's office to determine whether our medicines may be appropriate, and physician concerns about initiating new pulmonary arterial hypertension (PAH) therapies via telemedicine. This had a negative impact on our revenues during the second quarter of 2020, and we believe muted the potential growth of Orenitram sales following the successful FREEDOM-EV study and improved FDA-labeling for Orenitram. Since then, our field-based teams have been increasingly able to resume in-person visits with physicians, although virtual visits remain common depending on the impact of the pandemic, including variants, on any particular region or hospital. Our clinical studies have been impacted. Most of our ongoing clinical studies initially paused enrollment during the first quarter of 2020 due to the pandemic, but patients already enrolled in studies continued to receive the study drug and complete necessary clinical evaluations as appropriate. This enrollment pause was lifted for all of our studies, but initially we were only able to re-open enrollment at a limited number of clinical trial sites. We continue to experience COVID-19 related delays in enrollment but are increasingly resuming more typical, pre-pandemic enrollment rates.
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For additional discussion of the risks to our business associated with COVID-19,
please see the risk factor above entitled, We face risks and uncertainties
related to the COVID-19 pandemic, which could significantly disrupt our
operations and/or business for an unknown period of time.
Overview of Marketed Products
We market and sell the following commercial products:
•Tyvaso, an inhaled formulation of the prostacyclin analogue treprostinil, approved by the FDA and regulatory authorities inArgentina andIsrael to improve exercise ability in PAH patients. Tyvaso was also approved by the FDA inMarch 2021 to improve exercise ability in patients with PH-ILD. •Remodulin, a continuously-infused formulation of treprostinil, approved by the FDA for subcutaneous and intravenous administration to diminish symptoms associated with exercise in patients with PAH. Remodulin has also been approved in various countries outside ofthe United States . InFebruary 2021 , we launchedU.S. sales of the Remunity Pump, a new subcutaneous delivery system for Remodulin.
•Orenitram, a tablet dosage form of treprostinil, approved by the FDA to delay
disease progression and improve exercise capacity in PAH patients.
•Unituxin, a monoclonal antibody approved in
•Adcirca, an oral PDE-5 inhibitor approved by the FDA to improve exercise
ability in PAH patients.
For additional detail regarding our commercial products, see Part I,
Item 1-Business-Our Commercial Products.
Research and Development
We are engaged in research and development of new indications and delivery devices for our existing products. This includes Tyvaso DPI, a dry powder inhalation form of Tyvaso. We also recently developed a new pump for Remodulin, called the Remunity Pump, and are currently developing a new version of the Remunity Pump. We are also working with two medical device manufacturers to develop new delivery systems for Remodulin. We are studying Tyvaso in patients with PH-COPD (the PERFECT study) and idiopathic pulmonary fibrosis (the TETON studies). In addition, we are developing new products to treat PAH (RemoPro, ralinepag, and Aurora-GT). We are also heavily engaged in early-stage research and development of a number of organ transplantation-related technologies including regenerative medicine,3-D organ bioprinting, xenotransplantation, and ex-vivo lung perfusion. For additional detail regarding our research and development programs, see Part I, Item 1-Business-Research and Development.
Revenues
Our net product sales consist of sales of the five commercial products noted above. We have entered into separate, non-exclusive distribution agreements withAccredo Health Group, Inc. and its affiliates (Accredo) andCaremark, L.L.C. (CVS Specialty) to distribute Tyvaso, Remodulin, the Remunity Pump, and Orenitram inthe United States , and we have entered into an exclusive distribution agreement withASD Specialty Healthcare, Inc. , an affiliate of AmerisourceBergen Corporation, to distribute Unituxin inthe United States . We recently amended our agreements with Accredo and CVS Specialty to include the distribution of Tyvaso DPI, if and when it is approved by the FDA. We also sell Tyvaso, Remodulin, and Unituxin to distributors internationally. We sell Adcirca through the pharmaceutical wholesale network of Eli Lilly and Company (Lilly). To the extent we have increased the price of any of these products, increases have typically been in the single-digit percentages per year, except for Adcirca, the price of which is set solely by Lilly. We require our specialty pharmaceutical distributors to maintain reasonable levels of inventory reserves for our treprostinil-based therapies because the interruption of these therapies can be life threatening. Our specialty pharmaceutical distributors typically place monthly orders based on current utilization trends and contractual minimum and maximum inventory requirements. As a result, sales of our treprostinil-based therapies can vary depending on the timing and magnitude of these orders and do not precisely reflect changes in patient demand. Operating Expenses We devote substantial resources to our various clinical trials and other research and development efforts, which are conducted both internally and through third parties. From time to time, we also license or acquire additional technologies and compounds to be incorporated into our development pipeline. Our operating expenses include the costs described below.
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Cost of Product Sales
Our cost of product sales primarily includes costs to manufacture our products, royalty and milestone payments under license agreements granting us rights to sell related products, direct and indirect distribution costs incurred in the sale of our products, and the costs of inventory reserves for current and projected obsolescence. These costs also include share-based compensation and salary-related expenses for direct manufacturing and indirect support personnel, quality review and release for commercial distribution, direct materials and supplies, depreciation, facilities-related expenses, and other overhead costs.
Research and Development
Our research and development expenses primarily include costs associated with the research and development of products and post-marketing research commitments. These costs also include share-based compensation and salary-related expenses for research and development functions, professional fees for preclinical and clinical studies, costs associated with clinical manufacturing, facilities-related expenses, regulatory costs, and costs associated with payments to third-party contract manufacturers before FDA approval of the relevant product. Expenses also include costs for third-party arrangements, including upfront fees and milestone payments required under license arrangements for therapies under development. We have incurred, and expect to continue to incur, significant clinical trial-related expenses, driven by the expansion of our pipeline programs.
Selling, General, and Administrative
Our selling, general, and administrative expenses primarily include costs associated with the commercialization of approved products and general and administrative costs to support our operations. Selling expenses also include share-based compensation, salary-related expenses, product marketing and sales operations costs, and other costs incurred to support our sales efforts. General and administrative expenses also include our core corporate support functions such as human resources, finance, and legal, external costs to support our core business such as insurance premiums, legal fees, and other professional service fees. Share-Based Compensation Historically, we granted stock options under our Amended and Restated Equity Incentive Plan and awards under our Share Tracking Awards Plans (STAP). Issuance of awards under these plans was discontinued in 2015. Currently, we grant stock options and restricted stock units under theUnited Therapeutics Corporation Amended and Restated 2015 Stock Incentive Plan (as amended to date, the 2015 Plan), which provides for the issuance of up to 11,000,000 shares of our common stock, including the 1,000,000 shares added pursuant to an amendment and restatement of the 2015 Plan approved by our shareholders inJune 2021 . InFebruary 2019 , our Board of Directors approved the 2019 Inducement Stock Incentive Plan (the 2019 Inducement Plan), which provides for the issuance of up to 99,000 shares of our common stock pursuant to awards granted to newly-hired Unitherians. Currently, we grant equity-based awards to Unitherians and members of our Board of Directors in the form of stock options and restricted stock units under the 2015 Plan, and we grant restricted stock units to newly-hired Unitherians under the 2019 Inducement Plan. The grant date fair values of stock options and restricted stock units are recognized as share-based compensation expense ratably over their vesting periods. The fair value of STAP awards and stock options is measured using inputs and assumptions under the Black-Scholes-Merton model. The fair value of restricted stock units is measured using our stock price on the date of grant. Although we no longer grant STAP awards, we still had approximately 1.1 million STAP awards outstanding as ofDecember 31, 2021 . We account for STAP awards as liabilities because they are settled in cash. As such, we must re-measure the fair value of STAP awards at the end of each financial reporting period until the awards are no longer outstanding. Changes in our STAP liability resulting from such re-measurements are recorded as adjustments to share-based compensation expense (benefit) and can create substantial volatility within our operating expenses from period to period. The following factors, among others, have a significant impact on the amount of share-based compensation expense (benefit) recognized in connection with STAP awards from period to period: (1) volatility in the price of our common stock (specifically, increases in the price of our common stock will generally result in an increase in our STAP liability and related compensation expense, while decreases in our stock price will generally result in a reduction in our STAP liability and related compensation expense); and (2) changes in the number of outstanding awards.
Future Prospects
We anticipate that overall revenue growth over the near-term will be driven primarily by: (1) growth in sales of Tyvaso as a result of the expansion of its label to include PH-ILD; (2) continued growth in the number of patients prescribed with Orenitram following our expansion of the Orenitram label to reflect the results of the FREEDOM-EV study; (3) the launch of sales of Tyvaso DPI if and when it is approved; (4) the potential approval of Tyvaso to treat PH-ILD inEurope and other new markets; and (5) modest price increases for some of our products; partially offset by further generic erosion for Adcirca. We believe that additional revenue growth in the medium- and longer-term will be driven by commercializing four key therapeutic platforms in our pipeline, which are comprised of the enabling technologies described below:
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Platform Enabling Technologies Tyvaso (inhaled treprostinil) Tyvaso DPI, PERFECT study, TETON studies Remodulin (parenteral treprostinil) RemoPro, Remunity
(machine-filled), additional
next-generation pump
systems
New Chemical Entities and New Biologics Ralinepag, SAPPHIRE study
Organ Manufacturing and Transplantation Xenotransplantation, three-dimensional organ
bioprinting, regenerative medicine, ex-vivo lung
perfusion
We believe that this diverse portfolio of four therapeutic platforms will lead
to significant revenue growth over the medium- and longer-term. For further
details regarding our research and development initiatives, please see Part I,
Item 1-Business-Research and Development.
Our ability to achieve our objectives, grow our business, and maintain
profitability will depend on many factors, including among others: (1) the
timing and outcome of preclinical research, clinical trials, and regulatory
approval applications for products we develop; (2) the timing and degree of our
success in commercially launching new products; (3) the demand for our products;
(4) the price of our products and the reimbursement of our products by public
and private health insurance organizations; (5) the competition we face within
our industry, including competition from generic companies and new PAH
therapies; (6) our ability to effectively manage our business in an increasingly
complex legal and regulatory environment; (7) our ability to defend against
challenges to our patents; (8) the duration and severity of the COVID-19
pandemic; and (9) the risks identified in Part I, Item 1A-Risk Factors, included
in this Report.
We operate in a highly competitive market in which a small number of large
pharmaceutical companies control a majority of available PAH therapies. These
pharmaceutical companies are well established in the market and possess greater
financial, technical, and marketing resources than we do. In addition, there are
a number of investigational products in late-stage development that, if
approved, may erode the market share of our existing commercial therapies and
make market acceptance more difficult to achieve for any therapies we attempt to
market in the future.
Results of Operations
This section of this Report generally discusses 2021, 2020, and 2019 items and
year-to-year comparisons between 2021 and 2020. Discussions of year-to-year
comparisons between 2020 and 2019 that are not included in this Report can be
found in Part II, Item 7-Management's Discussion and Analysis of Financial
Condition and Results of Operations-Results of Operations of our Form 10-K filed
on February 24, 2021 (our 2020 Annual Report).
Revenues
The table below presents the components of total revenues (dollars in millions):
Year Ended December 31, Dollar Change Percentage Change
2021 2020 2019 2021 v. 2020 2020 v. 2019 2021 v. 2020 2020 v. 2019
Net product sales:
Tyvaso $ 607.5 $ 483.3 $ 415.6 $ 124.2 $ 67.7 26 % 16 %
Remodulin 513.7 516.7 587.0 (3.0) (70.3) (1) % (12) %
Orenitram 306.1 293.1 225.3 13.0 67.8 4 % 30 %
Unituxin 202.3 122.9 113.7 79.4 9.2 65 % 8 %
Adcirca 55.9 67.3 107.2 (11.4) (39.9) (17) % (37) %
Total revenues$ 1,685.5 $ 1,483.3 $ 1,448.8 $ 202.2 $ 34.5 14 % 2 %
Net product sales from our treprostinil-based products (Tyvaso, Remodulin, and
Orenitram) grew by
Tyvaso net product sales increased in 2021, as compared to 2020, primarily due to an increase in quantities sold, reflecting an increased number of patients following the PH-ILD label expansion and, to a lesser extent, price increases. Remodulin net product sales decreased in 2021, as compared to 2020, driven by a$28.9 million decrease inU.S. Remodulin net product sales, partially offset by a$25.9 million increase in international Remodulin net product sales. The decrease inU.S. Remodulin net product sales was primarily due to a decrease in quantities sold and, to a lesser extent, higher gross-to-net deductions. The increase in international Remodulin net product sales was primarily due to reduced orders by an international distributor in 2020 in order to reduce its inventory as a result of the anticipated impact of generic competition. Unituxin net product sales increased in 2021, as compared to 2020, due to an increase in quantities sold and, to a lesser extent, price increases. The increase in quantities sold in 2021 included$18.4 million related to the launch of Unituxin inJapan .
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Gross-to-Net Deductions
We recognize revenues net of: (1) rebates and chargebacks; (2) prompt pay
discounts; (3) allowance for sales returns; and (4) distributor fees. These are
referred to as gross-to-net deductions and are primarily based on estimates
reflecting historical experiences as well as contractual and statutory
requirements. We currently estimate our allowance for sales returns using
reports from our distributors and available industry data, including our
estimate of inventory remaining in the distribution channel. The tables below
include a reconciliation of the liability accounts associated with these
deductions (in millions):
Year Ended
Rebates & Prompt Pay Allowance for
Chargebacks Discounts Sales Returns Distributor Fees Total
Balance, January 1, 2021 $ 65.3 $ 3.0 $ 12.5 $ 3.7 $ 84.5
Provisions attributed to sales in:
Current period 217.0 38.5 - 31.3 286.8
Prior periods 1.6 - (3.9) 0.2 (2.1)
Payments or credits attributed to
sales in:
Current period (151.8) (34.7) - (22.4) (208.9)
Prior periods (64.3) (3.0) (2.3) (4.9) (74.5)
Balance, December 31, 2021 $ 67.8 $ 3.8 $ 6.3 $ 7.9 $ 85.8
Year Ended December 31, 2020
Rebates & Prompt Pay Allowance for
Chargebacks Discounts Sales Returns Distributor Fees Total
Balance, January 1, 2020 $ 51.7 $ 2.6 $ 14.2 $ 4.1 $ 72.6
Provisions attributed to sales in:
Current period 196.1 32.5 - 20.6 249.2
Prior periods (0.2) - - (0.3) (0.5)
Payments or credits attributed to
sales in:
Current period (139.7) (29.6) - (16.9) (186.2)
Prior periods (42.6) (2.5) (1.7) (3.8) (50.6)
Balance, December 31, 2020 $ 65.3 $ 3.0 $ 12.5 $ 3.7 $ 84.5
Year Ended December 31, 2019
Rebates & Prompt Pay Allowance for
Chargebacks Discounts Sales Returns Distributor Fees Total
Balance, January 1, 2019 $ 54.7 $ 3.2 $ 22.4 $ 4.8 $ 85.1
Provisions attributed to sales in:
Current period 172.8 31.3 (2.6) 19.0 220.5
Prior periods 5.9 - (3.6) - 2.3
Payments or credits attributed to
sales in:
Current period (126.1) (28.9) - (15.0) (170.0)
Prior periods (55.6) (3.0) (2.0) (4.7) (65.3)
Balance, December 31, 2019 $ 51.7 $ 2.6 $ 14.2 $ 4.1 $ 72.6
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Cost of Product Sales
The table below summarizes cost of product sales by major category (dollars in
millions):
Year Ended December 31, Dollar Change Percentage Change
2021 2020 2019 2021 v. 2020 2020 v. 2019 2021 v. 2020 2020 v. 2019
Category:
Cost of product sales $ 116.7 $ 101.0 $ 117.4 $ 15.7 $ (16.4) 16 % (14) %
Share-based compensation
expense(1) 5.8 7.1 0.2 (1.3) 6.9 (18) % NM(2)
Total cost of product sales $ 122.5 $ 108.1 $ 117.6 $ 14.4 $ (9.5) 13 % (8) %
(1)Refer to Share-Based Compensation section below for discussion.
(2)Calculation is not meaningful.
Cost of product sales, excluding share-based compensation. The increase in cost of product sales for the year endedDecember 31, 2021 , as compared to the same period in 2020, was primarily attributable to shipments of the Remunity Pump following launch inFebruary 2021 .
Research and Development
The table below summarizes research and development expense by major category
(dollars in millions):
Year Ended December 31, Dollar Change Percentage Change
2021 2020 2019 2021 v. 2020 2020 v. 2019 2021 v. 2020 2020 v. 2019
Category:
Research and development projects $ 515.7 $ 328.2 $ 1,182.2 $ 187.5 $ (854.0) 57 % (72) %
Share-based compensation expense(1) 24.4 29.5 0.4 (5.1) 29.1 (17) % NM(2)
Total research and development
expense $ 540.1 $ 357.7 $ 1,182.6 $ 182.4 $ (824.9) 51 % (70) %
(1)Refer to Share-Based Compensation section below for discussion.
(2)Calculation is not meaningful.
Research and development, excluding share-based compensation. The increase in research and development expense for the year endedDecember 31, 2021 , as compared to the same period in 2020, was due to: (1) a$107.3 million in-process research and development impairment charge related to ourMarch 2021 decision to discontinue theU.S. development of Trevyent; (2) a$105.0 million purchase of a pediatric disease priority review voucher, which we redeemed upon submission of the Tyvaso DPI NDA; and (3) an$11.6 million impairment charge related to repurposing one of our facilities. These increases were partially offset by a decrease in milestone payments under our license and collaboration agreement with MannKind and reduced costs following the completion of the phase 3 DISTINCT study of Unituxin in 2020.
Selling, General, and Administrative
The table below summarizes selling, general, and administrative expense by major
category (dollars in millions):
Year Ended December 31 , Dollar Change
Percentage Change
2021 2020 2019 2021 v. 2020 2020 v. 2019 2021 v. 2020 2020 v. 2019
Category:
General and administrative $ 294.3 $ 241.8 $ 230.7 $ 52.5 $ 11.1 22 % 5 %
Sales and marketing 64.4 54.9 60.7 9.5 (5.8) 17 % (10) %
Share-based compensation expense(1) 108.3 127.2 44.8 (18.9) 82.4 (15) % 184 %
Total selling, general, and
administrative expense $ 467.0 $ 423.9 $ 336.2 $ 43.1 $ 87.7 10 % 26 %
(1)Refer to Share-Based Compensation section below for discussion.
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General and administrative, excluding share-based compensation. The increase in general and administrative expense for the year endedDecember 31, 2021 , as compared to the same period in 2020, was primarily due to: (1) an increase in litigation expenses; and (2) an increase in consulting expenses.
Share-Based Compensation
The table below summarizes share-based compensation expense (benefit) by major
category (dollars in millions):
Year Ended December 31 , Dollar Change
Percentage Change
2021 2020 2019 2021 v. 2020 2020 v. 2019 2021 v. 2020 2020 v. 2019
Category:
Stock options $ 25.4 $ 44.0 $ 70.5 $ (18.6) $ (26.5) (42) % (38) %
Restricted stock units 24.7 20.5 13.3 4.2 7.2 20 % 54 %
STAP awards 86.6 97.8 (39.7) (11.2) 137.5 (11) % 346 %
Employee stock purchase plan 1.8 1.5 1.3 0.3 0.2 20 % 15 %
Total share-based compensation
expense $ 138.5 $ 163.8 $ 45.4 $ (25.3) $ 118.4 (15) % 261 %
The table below summarizes share-based compensation expense by line item in our
consolidated statements of operations (dollars in millions):
Year Ended December 31, Dollar Change Percentage Change
2021 2020 2019 2021 v. 2020 2020 v. 2019 2021 v. 2020 2020 v. 2019
Cost of product sales $ 5.8 $ 7.1 $ 0.2 $ (1.3) $ 6.9 (18) % NM(1)
Research and development 24.4 29.5 0.4 (5.1) 29.1 (17) % NM(1)
Selling, general, and administrative 108.3 127.2 44.8 (18.9) 82.4 (15) % 184 %
Total share-based compensation expense $ 138.5 $ 163.8 $ 45.4 $ (25.3) $ 118.4 (15) % 261 %
(1)Calculation is not meaningful.
The decrease in share-based compensation expense for the year endedDecember 31, 2021 , as compared to the same period in 2020, was primarily due to: (1) a decrease in stock option expense due to fewer awards granted and outstanding in 2021; and (2) a decrease in STAP expense driven by a 42 percent increase in our stock price during 2021, as compared to a 72 percent increase in our stock price during 2020, partially offset by an increase in restricted stock unit expense. Refer to Note 8-Share-Based Compensation, to our consolidated financial statements for more information.
Other Income, Net
The change in other income, net for the year endedDecember 31, 2021 , as compared to the same period in 2020, was primarily due to the recognition of net unrealized and realized gains on our investments in equity securities and net unrealized gains and losses on our contingent consideration assets. Refer to Note 4-Investments and Note 5-Fair Value Measurements, to our consolidated financial statements for more information.
Impairments of Investments in Privately-Held Companies
During the years endedDecember 31, 2021 and 2020, we recorded$2.3 million and$9.1 million , respectively, of impairment charges related to our investments in privately-held companies.
Income Tax Expense (Benefit)
Income tax expense was$118.1 million for the year endedDecember 31, 2021 , as compared to$124.1 million for the same period in 2020. For the years endedDecember 31, 2021 and 2020, our effective income tax rates (ETR) were approximately 20 percent and 19 percent, respectively. Our ETR for the year endedDecember 31, 2021 increased, as compared to our ETR for the year endedDecember 31, 2020 , primarily due to increases in blended state income tax rates and decreases in tax credits, partially offset by a decrease in the valuation allowance on deferred taxes. For additional details, refer to Note 10-Income Taxes to our consolidated financial statements.
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Financial Condition, Liquidity, and Capital Resources
We have funded our operations principally through sales of our commercial products and, from time-to-time, third-party financing arrangements. We believe that our current liquidity is sufficient to fund ongoing operations and future business plans as we expect aggregate growth in revenues from our commercial products. Furthermore, our customer base remains stable and we believe that it presents minimal credit risk. However, any projections of future cash flows are inherently subject to uncertainty and we may seek other forms of financing. InJune 2018 , we entered into a credit agreement (the Credit Agreement), which provides an unsecured, revolving line of credit of up to$1.5 billion . Our aggregate outstanding balance under the Credit Agreement, which matures in 2025, was$800.0 million and classified as a non-current liability in our consolidated balance sheets as of bothDecember 31, 2021 and 2020.
For information regarding the fluctuation explanations between 2020 and 2019,
refer to our 2020 Annual Report.
Cash and Cash Equivalents and Marketable Investments
Cash and cash equivalents and marketable instruments comprise the following
(dollars in millions):
Year Ended December 31, Percentage Change
2021 2020 2021 v. 2020
Cash and cash equivalents $ 894.8 $ 738.7 21 %
Marketable investments-current 1,035.9 1,096.3 (6) %
Marketable investments-non-current 1,649.9 1,149.6 44 %
Total cash and cash equivalents and marketable investments $ 3,580.6 $ 2,984.6 20 %
Cash Flows
Cash flows comprise the following (dollars in millions):
Year Ended December 31, Percentage Change
2021 2020 2019 2021 v. 2020 2020 v. 2019
Net cash provided by (used in) operating
activities $ 598.2 $ 755.7 $ (206.6) (21) % 466 %
Net cash used in investing activities
$ (335.4) 34 % (120) % Net cash provided by (used in) financing activities$ 44.8 $ (16.9) $ 611.2 365 % (103) % Operating Activities
Our operating assets and liabilities consist primarily of accounts receivable,
inventories, accounts payable, accrued expenses, liabilities for our STAP
awards, and tax-related payables and receivables.
The decrease of$157.5 million in net cash provided by operating activities for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 , was primarily due to: (1) a$105.0 million purchase of a pediatric disease priority review voucher; (2) a$60.5 million increase in cash paid for income taxes; and (3) a$55.0 million increase in cash paid to settle STAP awards, partially offset by a$4.5 million decrease in cash paid for interest and other changes in assets and liabilities.
Investing Activities
The decrease of$251.6 million in net cash used in investing activities for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 , was primarily due to a$315.5 million decrease in cash used for total purchases, sales, and maturities of marketable investments, partially offset by a$61.5 million increase in cash paid to purchase property, plant, and equipment.
Financing Activities
The decrease of$61.7 million in net cash used in financing activities for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 , was primarily due to: (1) an absence of repayments on our line of credit during the year endedDecember 31, 2021 , as compared to a$50.0 million repayment on our line of credit during year endedDecember 31, 2020 ; and (2) a$16.2 million increase in proceeds from the exercise of stock options during the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 .
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Unsecured Revolving Credit Facility
InJune 2018 , we entered into the Credit Agreement, which provides for an unsecured revolving credit facility of up to$1.5 billion . OnJune 27, 2018 , we borrowed$250.0 million under this facility and used the funds to repay outstanding indebtedness under a previous credit facility that was terminated in 2018. InJanuary 2019 , we borrowed an additional$800.0 million under this facility and used the funds for an upfront payment related to the global license agreement with Arena. We did not pay down our balance under the Credit Agreement during the year endedDecember 31, 2021 . We paid down$50.0 million and$200.0 million of our balance under the Credit Agreement during the years endedDecember 31, 2020 and 2019, respectively. The aggregate balance of$800.0 million remained outstanding as of bothDecember 31, 2021 andFebruary 24, 2022 . Refer to Note 7-Debt, to our consolidated financial statements.
Contractual Obligations
AtDecember 31, 2021 , we had the following contractual obligations (in millions): Payments Due by Period Less than More than 5 Total 1 year 2-3 Years 4-5 Years Years Operating lease obligations$ 18.9
Long-term debt obligations(1)
863.9 16.0 31.9 816.0 - Obligations under the STAP(2) 99.2 99.2 - - - Obligations under the SERP(3) 86.7 18.2 22.8 6.8 38.9 Purchase obligations(4) 477.1 342.6 100.6 19.3 14.6 Total(5) (6)$ 1,545.8 $ 479.1 $ 160.4 $ 845.6 $ 60.7 (1)Long-term debt obligations include future principal and interest payments on our LIBOR-based variable rate obligations under the Credit Agreement, assuming contractual maturity of the Credit Agreement. The Credit Agreement will mature inDecember 2025 . As ofDecember 31, 2021 , we have classified the entire$800.0 million outstanding balance as a non-current liability, since we have no intention to repay any portion of the outstanding balance during 2022. Refer to Note 7-Debt to our consolidated financial statements for further details.
(2)Estimated based on the intrinsic value of exercisable outstanding STAP awards
as of
consolidated financial statements for further details.
(3)Consists of actuarially derived, undiscounted, estimated future payouts of
benefits. Refer to Note 11-Employee Benefit Plans-Supplemental Executive
Retirement Plan to our consolidated financial statements for further details.
(4)Purchase obligations primarily include: (1) commitments related to research and development (including clinical trials) for new and existing products; (2) open purchase orders for capital expenditures primarily related to our continued investment in construction of additional facilities to support the development and commercialization of our products and technologies; and (3) open purchase orders for the acquisition of goods and services in the ordinary course of business. The timing and amount of our obligations may differ based on certain future events. (5)In addition to amounts in the table above, we are contractually obligated to make payments upon the achievement of various development, regulatory, and commercial milestones for agreements we have entered into with third parties. These payments are contingent upon the occurrence of various future events, some of which have a high degree of uncertainty of occurring. These contingent payments have not been included in the table above, and, except with respect to the fair value of the contingent consideration obligations, are not recorded in our consolidated balance sheets. Refer to Note 12-Commitments and Contingencies to our consolidated financial statements for further details. (6)As ofDecember 31, 2021 , our other non-current liabilities in our consolidated balance sheets includes a liability of$3.9 million for unrecognized tax benefits, including related interest and penalties. Due to the high degree of uncertainty on the timing of future events that could extinguish these unrecognized tax benefits, we are unable to estimate the period of settlement and therefore we have excluded these unrecognized tax benefits from the table above. Refer to Note 10-Income Taxes to our consolidated financial statements for further details.
Obligations Under License Agreements
We pay Lilly a royalty equal to ten percent of our net product sales of Adcirca, as well as milestone payments equal to$325,000 for each$1,000,000 in Adcirca net product sales. We pay a single-digit percentage royalty based on net product sales of Orenitram under our license agreement with Supernus. We also payThe Scripps Research Institute a one percent royalty on sales of Unituxin. We have entered into other license agreements under which we are required to make milestone payments upon the achievement of certain developmental and commercialization objectives and royalty payments upon the commercialization of products covered by the license agreements. Refer to Note 12-Commitments and Contingencies to our consolidated financial statements for further details.
2021 Annual Report 57
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Off-Balance Sheet Arrangements
We hold an interest in an unconsolidated variable interest entity (VIE). We determined that we are not the primary beneficiary of this entity. As a result, we do not consolidate this VIE. Refer to Note 4-Investments-Variable Interest Entities. We do not have any other off-balance sheet arrangements within the meaning of Item 303(a)(4) of Regulation S-K.
Summary of Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with generally accepted accounting principles inthe United States (GAAP). GAAP requires that we make estimates and assumptions that affect the amounts and timing reported in our consolidated financial statements. As we become aware of updated information or new developments, these estimates and assumptions may change and materially impact reported amounts. We consider the following accounting policies to be critical to our consolidated financial statements because they require the use of our judgment and estimates (including those that are forward-looking) in their application.
Revenue Recognition
We generate revenues from the sale of our five commercial products: Tyvaso, Remodulin, Orenitram, Unituxin, and Adcirca. Revenue is recognized when we transfer control of our products to our distributors, as our contracts have a single performance obligation (delivery of our product). These revenues are subject to various product sales allowances, referred to as gross-to-net deductions, which are deducted from revenues to determine net product sales. For a description of our related accounting policies, refer to Note 2-Summary of Significant Accounting Policies-Revenue Recognition to our consolidated financial statements.
The following category of gross-to-net deductions involves the use of
significant estimates and judgments and information obtained from external
sources.
Rebates and Chargebacks
Our most significant rebates relate to our participation in state Medicaid programs, contractual rebates to certain of our domestic distributors, and contractual rebates offered to managed care organizations covering Medicare Part D and commercial plans. Chargebacks relate to our participation in programs with theU.S. Department of Veterans Affairs and 340B covered entities. Although we accrue for our allowance for rebates and chargebacks in the same period that we recognize revenue, the actual rebate or chargeback on the sale of our product to a distributor is not invoiced to us until a future period, generally within six months from the date of sale. Due to this time lag, we must estimate the amount of rebates and chargebacks to accrue. As ofDecember 31, 2021 and 2020, we had a liability of$67.8 million and$65.3 million , respectively, related to rebates and chargebacks. Estimates associated with our participation in state Medicaid programs are particularly susceptible to adjustment given the extensive time lag that may occur between our recording of an accrual and its ultimate invoicing by individual state Medicaid programs, which can occur up to several years after the sale of our product. Because of the time lag for Medicaid and other rebates, in any particular quarter, our adjustments may incorporate revisions of accruals for prior quarters. Historically, adjustments to our estimates to reflect actual results or updated expectations have not been material to our overall financial results. Provisions attributed to sales in prior periods have been less than one percent of our net product sales for each of the years endedDecember 31, 2021 , 2020, and 2019. For a roll-forward of the liability accounts associated with our gross-to-net deductions, see the section above entitled Results of Operations-Gross-to-Net Deductions. Share-Based Compensation Our share-based awards are classified as either liabilities (STAP awards) or as equity (stock options, restricted stock units, and rights to purchase stock under our employee stock purchase plan). We recognize related share-based compensation expense based on (1) the fair value of outstanding STAP awards on the grant date and at the end of each reporting period; (2) the grant date fair value of stock options and restricted stock units; and (3) the purchase date fair value of stock under our employee stock purchase plan. With the exception of restricted stock units, we estimate the fair value of all share-based awards using the Black-Scholes-Merton valuation model. We measure the fair value of restricted stock units using the stock price on the grant date. Valuation models, like the Black-Scholes-Merton model, require the use of subjective assumptions that could materially impact the estimation of fair value and related compensation expense to be recognized. These assumptions include the expected volatility of our stock price and the expected term of awards. Developing these assumptions requires the use of judgment. For additional information on the assumptions used in the Black-Scholes-Merton valuation model, see Note 8-Share-Based Compensation, to our consolidated financial statements.
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Recently Issued Accounting Standards
See Note 3-Recently Issued Accounting Standards, to our consolidated financial
statements for information on our anticipated adoption of recently issued
accounting standards.
CNO FINANCIAL GROUP, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CIGNA CORP FILES (8-K) Disclosing Regulation FD Disclosure
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