United Therapeutics Strategic Analysis: Finance, Ethics & Growth

Introduction and Company Overview

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 a telemedicine platform 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 is congruent with the firm's five stated strategic objectives:

1. Develop the best medicines possible from our intellectual property.
2. Conduct the most insightful clinical trials of our medicines.
3. Achieve superior communication and awareness of our products among physicians.
4. Grow our business to be in the top quintile of our peers.
5. Achieve our goals by doing the right thing and using the highest ethical standards.
(Source: United Therapeutics website)

This paper examines the performance of United Therapeutics within the context of both this strategic mission and a variety of different variables. These variables include not only financial performance but also scientific challenges, marketing considerations, ethical concerns, regulatory issues, and issues of managerial leadership. At the conclusion of the paper, recommendations are offered with respect to how United Therapeutics can address the challenges presented by its internal and external environments, and how it can capitalize on the opportunities those environments present.

Key Science Challenges

There are a couple of key science challenges for United Therapeutics. The most significant is developing the research and development capacity to address the need to diversify 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 develop 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. The ability to leverage this license across a variety of different products will be more telling as to whether or not the company has truly achieved its objectives in this regard.

The biotechnology industry generally provides a favorable operating environment, particularly for a firm at the life cycle stage that United Therapeutics currently occupies. The industry is characterized by high intensity of competition, an intense regulatory environment, high development costs, and high profits.

Industry Concerns and Competitive Environment

Firms within the industry compete largely on the basis of technological superiority, developing solutions primarily for health problems. One of the key success drivers is therefore the efficacy of those solutions. Technological superiority is protected by strong intellectual property rights, which provide long-term protection that helps control market access and allows developers of new technologies to recoup their development expenses. Once intellectual property rights expire, 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, there are multiple viable solutions on the market. This risk of substitution necessitates heavy investment in marketing, which is typically directed at physicians and requires 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, and there can also be unforeseen delays in the regulatory process. For example, United experienced a delay for Tyvaso in response to an FDA demand for improved human factors testing. Such 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 at all, 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. Long-term intellectual property protection combined with an industry-wide emphasis on technological superiority as a source of competitive advantage allows firms to drive high margins. These margins not only offset the development costs of a commercialized product but also help cover development costs of products that failed to reach commercialization. As a result, one of the key drivers of success in the industry is bringing a high percentage of pipeline products through to commercialization.

Thus far, 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 industry success, while also avoiding some of the industry's key risk factors.

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, management believes that telemedicine could emerge as an everyday part of people's lives in the 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 million 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. The company is therefore expected to return to profitability in subsequent years, especially as Tyvaso rolls out into the marketplace.

United has a strong balance sheet. The firm carries a low degree of leverage, using debt financing 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 to $518 million. The firm has only recently taken on any meaningful debt. Debt acquired in 2006 was paid off in 2007, and more debt was acquired in 2008 to make the Eli Lilly payment, but debt financing still remains a minor part of United's financial strategy.

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 figure is skewed by the one-time Lilly write-off. Without that charge, the firm's profit margin would be substantially better than that of the industry. Five-year margin trends confirm that this outperformance 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, which means it is well-positioned to increase its research and development capabilities. The low degree of leverage allows the firm to acquire additional financing cheaply and easily on demand, enabling it to move with speed and flexibility to capitalize on market opportunities. While financial strength is not a form of competitive advantage in and of itself, it can be leveraged to build competitive advantages in the biotechnology industry.