United Therapeutics Is an American

United Therapeutics is an American biotechnology company specializing in solutions for "chronic life-threatening cardiovascular and infectious diseases and cancer" (2008 United Therapeutics Annual Report). The company currently has four main products -- Remodulin (to treat pulmonary arterial hypertension), Tadalafil and Tyvaso (also for pulmonary arterial hypertension) and Telemedicine (for heart monitoring). The company has an array of other drugs in the pipeline. Of the three closest to commercialization, two are for pulmonary arterial hypertension (PAH) and the other is for the treatment of neuroblastoma.

Products in the earlier stages of development evidence some degree of diversification on the part of United Therapeutics away from its core product line. United is on a strong growth track. Over the past five years, revenues have increased fourfold. This growth has come with a substantial increase in research and development expense in 2008, which in part resulted in the firm's first loss in several years. The rapid growth of the company and its desire are congruent with the firm's stated five strategic objectives.

These are: Develop the best medicines possible from out intellectual property Conduct the most insightful clinical trials of our medicines Achieve superior communication and awareness of our products among physicians Grow our business to be in the top quintile of our peers Achieve our goals by doing the right thing and using the highest ethical standards source: United Therapeutics website This paper will examine the performance of United Therapeutics within the context of both this strategic mission and within the context of a variety of different variables.

These variables will include not only financial performance but scientific challenges, marketing considerations, ethical concerns, regulatory issues and issues of managerial leadership. At the conclusion of the paper, recommendations will be offered with respect to the ways in which United Therapeutics can deals with the challenges presented by its internal and external environments, and how it can capitalize on the opportunities these environments present. Key Science Challenges There are a couple of key science challenges for United Therapeutics.

The most significant is the development of the research and development capacity to address the need to diversity the firm's technological competencies. At present, United has developed a strong technological competency in pulmonary arterial hypertension. This competency has been leveraged for several key products already, with two more in the pipeline near the point of commercialization. This fits with the firm's stated strategy to maximize returns on its intellectual property.

However, in order to meet its long-term strategic objective of joining the top quintile of biotechnology firms, United Therapeutics must development competencies and valuable intellectual property in the treatment of other ailments as well. A second science challenge for United Therapeutics is to find new uses for its core technologies. The company expects to expand beyond treprostinil for treatment of PAH, and appears to have achieved this goal in the short-term with the licensing from Eli Lilly of tadalafil.

Their ability to leverage this license with a variety of different products is going to be more telling as to whether or not they have achieved their objectives in this regard. Industry Concerns The biotechnology industry generally provides a favorable operating environment, in particular for a firm in the life cycle stage that United Therapeutics now occupies. The biotechnology industry is characterized by high intensity of competition, an intense regulatory environment, high development costs and high profits. Firms within the industry compete largely on the basis of technological superiority.

They development solutions, largely to health problems. One of the key success drivers, therefore, is the efficacy of those solutions. Technological superiority is protected with strong intellectual property rights. Solutions are given long-term protection, which helps to control market access and allow the developer of the new technologies to recoup their development expenses. Once intellectual property rights subside, firms must compete with generic products. United is a relatively young company, founded in 1996 (Unither.com, 2009) so at present its key intellectual property remains protected.

There is a high risk of substitution in the industry, however. At any one time, for any given ailment or health problem, there are multiple viable solutions on the market. This risk of substitution necessitates heavy investment in marketing. Marketing in the industry is typically direct to physicians, necessitating a large sales staff. Moreover, the marketing side of the industry is fraught with legal and ethical concerns. The biotechnology industry is also characterized by high development costs. The lead time for new products is measured in years.

The pipeline for a typical biotechnology solution has five stages -- the preclinical stage, Phase I, Phase II, Phase III and Commercialization. It can be expensive and time-consuming to progress through any one of these stages. There can also be unforeseen delays in the regulatory process. For example, United saw a delay this past spring for Tyvaso in response to FDA demand for improved human factors testing of the new product.

These delays can be expensive, can cost a firm first-mover advantage in the marketplace, and can complicate the rollout and marketing process. Some products may not pass the regulatory phases, leaving the firm with millions of dollars in sunk costs that will never be recouped. Despite these difficulties, there is significant attraction to the industry, primarily because of the high profitability potential of commercialized products.

With long-term intellectual property protection and an industry-wide emphasis on technological superiority as a source of competitive advantage allow firms in the industry to drive high margins. These margins not only offset the development costs of the commercialized product, but they also help to cover development costs of products that failed to survive to the commercialization stage. As a result, one of the key drivers of success in the industry is to bring a high percentage of products through the pipeline to commercialization.

Thus far in its existing, United Therapeutics has demonstrated the ability to bring products to market and as a result has been able to enjoy significant success in building its business. The firm has evidenced competency in each of the core areas of success in the industry, but it has also been successful at avoiding some of the industry's key risk factors as well. The telemedicine business is an unrelated line that amounts to a relatively small portion of total revenues for United.

The company competes based on a differentiated strategy, with a technological competitive advantage in its CardioPal product. Although United is focused on heart products, they feel that telemedicine could emerge as an everyday part of people's lives in future (United Therapeutics website, 2009). Financial Considerations United Therapeutics has exhibited good financial performance in recent years. The firm has grown revenues steadily over the past five years, from $73 million in 2004 to $281 million in 2008. The firm has been profitable in four of the past five years, with especially strong figures recorded in 2005 and 2006.

United recorded a loss in fiscal 2008 of $42.79 million (MSN Moneycentral, 2009). This was attributed by management in the 2008 Annual Report to a one-time payment of $150 to Eli Lilly for the licensing of tadalafil, the active drug in Cialis, for its pulmonary arterial hypertension inhalation treatment Tyvaso. This was recorded as a research and development expense on the income statement. Thus, the company is expected to return to profitability next year and in subsequent years, especially as Tyvaso rolls out into the marketplace. United has a strong balance sheet.

The firm has a low degree of leverage. Debt financing is used sparingly. The firm is cash rich, as evidenced by high current and other solvency ratios. Equity has grown at an uneven pace over the past five years, but has increased from $191 million five years ago to $518 million today. The firm has only recently taken on any debt at all. Debt acquired in 2006 was paid in 2007. More debt was acquired in 2008 to make the Eli Lilly payment, but debt financing still remains a minor part of United's financial plans.

The firm extracts higher than average margins. Its gross margin is 88.9%, compared with an industry average of 70%. Its profit margin matches that of the industry, but this is skewed by the one-time Lilly writeoff. Without that, the firm's profit margin would be substantially better than that of the industry. Five-year margins show that this trend has legs -- United Therapeutics consistently outperforms its industry peers. Financial strength in the short-term is a long-term competitive advantage for United Therapeutics. The company has consistently maintained a strong cash position.

As a result of this, United is well-positioned to increase its research and development capabilities. The low degree of leverage allows the firm to cheaply and easily acquire such financing on demand. This allows it to move with speed and flexibility to take advantage of opportunities in the market. The current trends in United's finances are encouraging, and the company's financial position can be seen as a source of strength.

While not a form of competitive advantage in and of itself, this financial strength can be leveraged to build competitive advantages in the biotechnology industry. Marketing Considerations Marketing in the biotechnology industry is critically important. The basic path to market involves receiving regulatory approval for products. From there, marketing is conducted to physicians directly, necessitating a relatively large sales force. The presence of competing treatments necessitates significant investment marketing, compounded by the impact of the need to recoup the sunk costs associated with product development.

In addition, marketing in the biotechnology industry is strictly regulated by the Food and Drug Administration. The FDA exerts tight control over marketing -- a firm is only allowed to promote products for approved uses. Off-label marketing -- defined as marketing a product for uses not approved by the FDA -- is prohibited and firms found guilty can be subject to significant fines. An example, of the strong regulatory influence on marketing can be found in the approval that United received in July for Tyvaso.

The product, already delayed multiple times by the FDA, was finally granted approval. With this approval came requirements known as post-marketing commitments. These included long-term studies on specific uses, usability analysis and the collection of pharmacokinetic data (United Therapeutics, 2009). Operating within the FDA's constraints, United has developed marketing strategies that it feels will increase the total market size for its products. The marketing plan for Remodulin is built around building awareness of PAH, and simultaneously building awareness for United's PAH products.

The marketing team for this product is growing, from 65 employees in 2007 to 80 in 2008. The sales teams are split into two groups -- inside and outside sales. The former focuses on accounts that have prescribed Remodulin in the past while the latter is focused on practices that are not yet accounts (2008 United Therapeutics Form 10-K, 8). United also utilizes marketing partnerships to help bring its products to market. Specialty pharmaceutical dealers have competencies in a wide range of areas that pertain to marketing issues in the industry.

These include patient care, administration of therapies, distribution and obtaining reimbursement from insurance companies. In Canada, distribution is conducted through a wholly-owned subsidiary. Internationally, United utilizes exclusive distribution agreements and has a wide range of geographic distribution (2008 United Therapeutics Form 10-K). United Therapeutics has steadily increased its marketing capabilities over the past few years. This has come in response to having an increasing number of products on the market. The firm's use of strategic partners and specialist distributors helps to broaden the scope of the market for its products.

It also flattens the learning curve for the young company with respect to the full range of marketing and regulatory issues to which United is subject. Furthermore, such alliances help the firm to focus its internal marketing capabilities on the domestic market. Ethical Considerations As with other biotechnology firms, United Therapeutics is subject to ethical scrutiny on two main fronts. One is with respect to the marketing of its products and the other is with respect to its corporate governance practices.

There are several ethical considerations with respect to marketing of pharmaceuticals. The marketing of such products is strictly controlled by the Food and Drug Administration. When the FDA approves a product, it does so only in the context of specific uses and scenarios. One of the most important areas of marketing ethics in biotech is with respect to the so-called "off-label" uses. Firms are not allowed to promote products for purposes not approved by the FDA. However, there are instances when such uses may be beneficial to a patient.

It is at the physician's discretion that such uses are prescribed. United has policies in place (Policy XII) to eliminate marketing of its products that contravene FDA regulations. United also has a Compliance Committee and Compliance Officer to enforce its house policies and provide guidance to marketing staff on ethical issues (United Therapeutics, 2009). The company also adheres to the guidelines set forth by the American Medical Association (AMA), the California Compliance Law (CCP), the Office of the Inspector General (OIG) and the Pharmaceutical Research and Manufacturers Association (PhRMA) (Ibid).

Another area of ethical consideration is with respect to clinical trials. There are several ethical issues in randomized clinical trials (RCTs). One is the use of placebo control subjects. These subjects may enroll in a trial in part because they wish to receive new therapy that can help them with their condition. If these subjects then receive a placebo instead, they are not receiving the benefit of the trial that other participants are receiving (Halpern, Doyle & Kawut, 2008).

Another ethical concern in trials is with respect to the patient's motives for joining a trial. While some do so for the treatment they may receive, or to help advance the cause of research, others may join a trial for less altruistic reasons. The benefits of the trial should be weighed against the costs and risks, in particular with respect to patients that are not joining the trial for altruistic reasons (Ibid). Lastly, some investigators may be subject to incentive-based motivation programs to enroll patients in clinical trials.

This can cause these investigators to use unethical methods to recruit patients. Incentives, either cash or authorship, should not be based on the number of patients the investigator enrolls (Ibid). As yet, United's compliance program has insulated it from scandal involving unethical marketing. The firm may suffer from questionable practices in the course of its clinical trials, however, and should keep on guard for ethical dilemmas during this part of its product development process. With respect to corporate governance, there are several potential issues.

Financial impropriety, failure to release pertinent information, fraud and insider trading are all potential scandals that can impact the firm's stock price, reputation and operations. The company has an extensive corporate governance code of conduct for its directors. The group has only two employee directors, something considered to be correlated with ethical issues. Thus far, United Therapeutics has not been subject to corporate governance scandal. Regulatory Issues The biotechnology industry is heavily regulated. The primary regulator for the industry is the Food and Drug Administration.

Firms within the industry are subject to FDA regulations. The agency has the power to sanction firms that commit transgressions of its regulations. Moreover, because the FDA controls market access for pharmaceutical products, it is critical that firms in the industry develop strong relationships with the agency. For example, one industry observer has illustrated the impacts that the FDA can have over a firm such as United Therapeutics. United is highly dependent at present on Remodulin, which accounted for 95% of revenue during the first half of 2008.

With generics of a competing drug now approval for PAH, Remodulin is now subject to increased competition. This in turn reduces United's pricing power, despite the retention of intellectual property rights for Remodulin (Phillips a, 2008). The same observer noted later that the FDA has rejected a late-stage trial for an oral treatment for PAH. This setback illustrated the dependency that biotechnology firms have on the FDA, in particular firms such as United that have limited product diversification (Phillips b, 2008).

It can be difficult for a firm to cultivate a strong relationship with the FDA. The agency acts as industry watchdog and supervisor, and its mandate can sometimes run counter to the interests of firms within the biotechnology industry. Effective working of the FDA system depends as much on experience with that system as anything else. United Therapeutics has not built up a sufficient body of work regarding it ability to deal with the FDA and obtain favorable results.

The oral FAH treatment and the delays in getting Tyvaso to market were discouraging signs, but not unreasonable ones. In addition, pharmaceuticals are subject to unique regulatory regimes in every jurisdiction in the world. To bring a drug to a global market, therefore, requires the company to gain regulatory approval from a multitude of agencies. The only exception is the European Union, where parts of the approval process may be undertaken on a multi-country basis (2008 United Therapeutics Form 10-K).

Another major regulatory consideration, which is tied heavily into the marketing component of the business, is with respect to Medicare payments. Businesses such as cardiac monitoring are heavily regulated by Medicare. The total demand for a product or service in the industry is subject to the availability of Medicare reimbursement for the treatment. If the firm cannot meet Medicare guidelines, it is ineligible for reimbursement and the potential market size for that treatment is reduced.

Additionally, Medicare regulations can also impact the amount of reimbursement from the program, impacting firm revenues. Legal Issues In the biotechnology industry, legal issues are typically tied to ethical and regulatory issues. For example, laws regarding the use of kickbacks are included in the federal health care program. The tight control of the industry, however, makes the incidence of legal issues beyond those included in the regulatory environment minimal.

Some of the non-FDA-related statutes that can impact United Therapeutics include statutes regarding fraud and abuse, those involving medical privacy (HIPAA), and antitrust laws (United Therapeutics, 2009). It is important to remember that FDA regulations apply to all personnel, not just sales staff and that the consequences are the same no matter from what point the violation originates. In general, United has been largely devoid of legal issues in its history, inclusive of FDA, Medicare and other regulatory issues.

There are, of course, the ever present legal issues surrounding intellectual property rights. It is important that United avoid misappropriating the intellectual property of competitors. As well, it must protect its own, as it was forced to do in a suit against Herbalife in 2006 (Biotech Patent News, 2006). Strategic Issues There are several key strategic issues for United Therapeutics. The firm has a wide-ranging set of strategic goals that it wishes to meet.

These include medicine development and maximization of value from intellectual property, conducting insightful clinical trials, achieving superior communication to physicians, upholding ethical standards and growing the business to enter the top quintile of competitors. One of the most significant strategic concerns for United is its relatively high level of dependence on its core product of Remodulin. Directly related to its core strategic objectives, United must find innovation new uses for the base product.

The firm failed last year to introduce an oral treatment for PAH, which was a setback for its strategic goals. However, they are moving ahead with further new product ideas for PAH treatment and have two in the latter stages of clinical trials. The other strategic implication for United' overreliance on Remodulin is that the firm needs to develop more products and thereby diversify its product line. Currently there is only one product in the latter stages of development that is not for PAH.

This is an impediment to long-term growth for a couple of reasons. One is that the company is competing vigorously with strong firms in the PAH business. Although it has had good success doing so with Remodulin, competition in the segment is increasing and there is belief among some observers that United could lose its pricing power on its core product.

The other reason that the lack of new product in the latter stages of development is an impediment to long-term growth is that the firm cannot build competencies and franchises in other areas without practical experience. The learning curve in other product areas, especially the cancer-related areas in which United wishes to compete, can be steep. As it stands now, it could be several years before United is a viable competitor in any other business besides PAH.

If they suffer any downturns in their core business in the interim, their financial condition could be compromised. There are significant challenges to the development of new products. The task takes many years and substantial amounts of capital. There are few shortcuts available, due to the high degree of regulatory influence over the process. There are ethical issues that can arise during the clinical trials; the trials may fail; the FDA may reject the trials; or the company may be otherwise compelled to abandon the project.

At present, United Therapeutics can, more or less, be considered a single-product company. The single-product nature of the company represents a significant constraint on the firm's ability to grow and improve its operations. It is continuing to develop new PAH treatments in line with its strategic objective to maximize the value of its existing intellectual property. However, the company is dependent on the PAH industry remaining a favorable one in which to operate.

Increasing amounts of competition, the availability of substitutes and the inability of United to have its oral application approval all point to a downward trend in the overall attractiveness of the industry. Nonetheless, United is bound to compete in this industry solely for a few more years at least. Thankfully for United, its finances are stellar. The firm has very little debt, a substantial cash stockpile and a history of positive earnings. This gives it the luxury of two things.

One is that United can plug more money into research and development, allowing it to diversify its product lines in the long run. It is working on both cancer treatments and on infectious disease treatments, such a Hepatitis C treatment presently in the pre-clinical phase (2008 United Therapeutics Annual Report). As noted, there is strong competition in the PAH segment of the biotechnology industry. The existing players are strong firms -- Pfizer, Gilead and Actelion. These firms owned six of the seven approved therapies for PAH as of mid-2008.

Additionally, generic versions of Flolan IV were coming onto the market. This raises the specter of decreasing revenue streams for the company. Quarter-over-quarter growth in revenues has been sluggish in the past year, with the company adding only $8m in revenues over the course of the past four quarters. In addition to Q4 of 2008, when the company took the R&D charge for the Eli Lilly deal, the most recent quarter also saw United Therapeutics record a loss.

This is attributed to a substantial increase in selling, general and administrative expenses without a corresponding increase in marketing expense. It is believed that much of this increase is attributed to the anticipated launch of Tyvaso. This represents another major strategic challenge for United. The company has four products currently on the market, but only one has demonstrated financial legs. United hopes that Tyvaso will join Remodulin as a cash cow, not just for its own sake but because it represents the potential to develop into a new PAH franchise.

The company believes that the Tyvaso product can be marketed through the existing channels used for Remodulin. However, those channels represent a substantial challenge for United. The firm acknowledges in the 2008 Annual Report that the best-selling oral medication for PAH, Tracleer, underperforms in tests. This gives the firm reason to believe that there is significant remaining potential market for Remodulin.

The latter is positioned as a more serious drug for more serious cases, but the firm believes its greater effectiveness than the more maintenance-oriented popular names gives it reason for optimism that much market remains. United will need to double-up on its marketing efforts in order to inform physicians of the merits of its drug, but will want to steer clear of recommending Remodulin for off-label uses that would have it compete directly against Tracleer in all circumstances. The telemedicine business is also worth noting.

United entered the business in 2000, presumably in a bid to earn short-term cash flow until Remodulin was approved (Fergo, 2001). This business now seems to fit no particular strategic need for the company. Neither, however, is it a distraction. The most value that telemedicine can offer United, however, is over the very long-term. If the technologies and techniques used can be adapted to other uses, then United may have a potentially valuable product on their hands.

At this point, however, the company does not appear terribly interested in developing the telemedicine business. Thus, the question of whether or not to retain this business in light of the two most recent FDA approvals is another, if minor, strategic issue that United should address in the coming years. Recommendations United Therapeutics is in general is a very well-run company. They have excellent financials and have avoided the major pitfalls that biotech firms can face in their heavily-regulated environment.

The firm has thus far lived up to its ethical commitments, and has steadily built its business around its core intellectual property. There is significant room for optimism with respect to the future of the company. However, there is also risk that United could be little more than a one-hit wonder, a track record that will eventually see the erosion of its cash stockpile. Each of the major strategic issues must be addressed in the coming months and years.