healthcare_fall2016_unitedtherapeutics

Student Managed Investment Fund Healthcare Sector | Fall 2016

05/01/2023 2Biotechnology

Table of Contents

Sector Outlook

Company Information

Company Drivers

Financial Analysis

Valuation Analysis

Summary

Appendix

Sector Outlook


Sector Performance

2-3 Years: 1,000-5,000 patients, 30% success rate

1-3 Years: Testing on 100-300 patients, 35% success rate

1 Year: Testing on 20-80 individuals, 66% success rate

HealthCare

Biotechnology

Consumer Discretionary

Financials

Information Technology

Industrials

Consumer Staples

Materials

Utilities

Telecommunication

Energy

-50% 0% 50% 100% 150% 200% 250%

107%

234%

101%

84%

76%

59%

55%

29%

20%

15%

-14%

Inelastic consumption

Defensive Nature

Emerging markets & population

growth

New Markets

Advances in technology &

medical equipment

Innovation

Industry Growth Drivers

Government Expenditure

Legislation & Regulation

Affordable Healthcare Act

Regulatory

Performance 2011 - 2015

60%10%

9%

12%

5% 4% Biotechnology

Healthcare Providers & Services

Pharmaceuticals

Healthcare Equipment & Services

Life Sciences, Tools & Services

Healthcare Technology

Breakdown by Subsector 2015 Breakdown by Region 2015

FDA

61.65%

18.98%

17.74%

3.40% 1.31%North America

Europe

Asia Pacific

Latin America

Middle East


Sub Sector Performance

Nov-11Jan-12

Mar-12

May-12Jul-1

2

Sep-12

Nov-12Jan-13

Apr-13Jun-13

Aug-13Oct-

13

Dec-13

Feb-14Apr-1

4Jun-14

Aug-14Oct-

14

Dec-14

Feb-15Apr-1

5Jun-15

Aug-15

Nov-15Jan-16

Mar-16

May-16Jul-1

6

Sep-16

Nov-16

900

1400

1900

2400

2900

3400

3900

4400

350

450

550

650

750

850

S&P 500 Biotechnology S&P 500 Healthcare

S&P 500 Index Performance Regulatory Agencies

United States Department of Agriculture

U.S Environmental Protection Agency

Food and Drug Administration

2012 2013 2014 2015 2016 2017E 2018E0

100

200

300

400

500

600

700

$276 $310

$359

$449 $488

$544 $609

Reve

nue

(Mill

ions

)

Biotech Sales Growth

Number of adults aged 65 and older Rising chronic diseases

Research and Development expenditure

Reduced drug price control

Biotech Drivers

Company Information


Company Overview

Previous Close $134.55

52-Week High $164.04

52-Week Low $97.52

Market Cap 5,513.2M

Outstanding Shares 42.4M

EPS $15.86

P/E 8.72x

Forward 1 year P/E 8.23x December 2011 December 2012 December 2013 December 2014 December 2015 September 2016

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

743.2

916.1

1,117.0

1,288.5

1,465.8 1,594.7 +115%

Ticker: UTHR

Biotechnology Company

Solutions for chronic and life-threatening diseases

Revenue Analysis (in millions)

$117

$119

$121

$123

$125

$127

$129

$131 +7.3%

Stock Price on Election Day

11/09/2016 Opening


Business Overview

39.2%

32.2%

19.1%

8.1%

1.4%

Remodulin Tyvaso Adcirca Orenitram Unituxin

92%

8%

United States Rest-of-World (Mostly Europe)

Remodulin Tyvaso Adcirca Orenitram Unituxin0

100

200

300

400

500

600

700

$573

$470

$279

$118

$20

Total Revenue 1,460.5 M

Total Revenue in 2015

Revenue Repartition in 2015 Geographic Repartition in 2015

Company Drivers


Consumer Trends

2000 2015 2030 20500

500

1000

1500

2000

2500

607901

1400

2100 +55%

HIV4%

Cumulative Trauma Disorder

50%

Portal Hypertension11%

Coronary Heart Disease19%

Drugs/Toxins10%

Other6%

2005 2007 2009 2011 2013 2015 2017 2019 2021$

$200

$400

$600

$800

$1000

$1200

$1400

$1600

$1800

$614.2$716.8

$852.9$960.8 $955.4

$1138.4

$1291.8

$1434.6

$1584.9

Defense & Veterans Health Insurance Assistance Medicaid Medicare (Net of Premiums) Other Total

Increase in PAH

Incidence

PAH Market expected to reach $8.7 Billion by

2025

Aging Population

Government Support

Government Spending

World Population Aged 60+ (in millions)

Diseases Related to Pulmonary Arterial Hypertension


License Agreements

2013 2014 2015 2016 2017 $-

$100

$200

$300

$400

$500

$600

$700

$491 $554 $573

$605 $610

$177 $222

$279

$355 $356

Remodulin Sales Adcirca Sales

2013 2014 2015 2016 2017 $-

$100 $200 $300 $400 $500 $600 $700

$491 $554 $573 $605 $610

59.3 47.3 12.4

Remodulin Sales Cost of Goods Sold

Adcirca represented 16%, 17%, and 19% of total revenue for 2013, 2014, and 2015

Develop and market beraprost for cardiovascular indications

Develop the Remodulin Implantable System

Goal is to develop pre-filled, semi-disposable pump for subcutaneous delivery

of Remodulin

Sales Growth Projections (in thousands)

Remodulin Sales and COGS (in thousands)


Patents

Remodulin

Tyvaso

Adcirca

Orenitram

Unituxin

$572.8M

$470.1M

$278.8M

$118.4M

$20.4M

Patents with expiration dates from 2017 to 2028

Patent expires in 2017



Patents expire in 2028 and 2029


Pipeline

PreclinicalUnexisome

Transplant OrgansRemoPro

CommercialRemodulin

TyvasoAdcirca

OrenitramUnituxin

Phase 1No drugs at the

moment

Phase 3RemoSynch (NDA)

RemUnity (NDA)

OreniPlusTysuberprost

Tyvaso-ILDRemoLivOreniLeft

Phase 2DinutuximabEx-Vivo Lung

PerfusionAurora-GTOreniCell


SWOT Analysis

S

T

W

O

Strengths

Large player in PAH Market Diversity of pipeline Large portion of revenue is

patented until 2028-2029

Threats

Increased tariffs Generic competition Delayed drug releases

Weaknesses

Production cost License Agreements can be

terminated

Opportunities

PAH market growth Increased infrastructure,

medical research

Financial Analysis


Liquidity & Solvency

2011 2012 2013 2014 20150%

5%

10%

15%

20%

25%

30%

35%

40%

45%

37.5%33.4%

39.7%

34.1%

27.3%28.0%25.5%

22.4%

10.2%

0.3%

21.9%20.3% 18.3%

9.2%

0.3%

Total Liabilities/Total Assets Total Debt/Equity Total Debt/Capital

2011 2012 2013 2014 2015 20160x

1x

2x

3x

4x

5x

2.6x

3.8x

1.3x

1.9x

2.9x

4.4x

2.3x

3.4x

1.2x

1.7x

2.6x

4.0x

Current Ratio Quick Ratio

CR +231%

2011 2012 2013 2014 20150x

20x

40x

60x

80x

100x

120x

140x

160x

180x

15x26x

16x31x

148x

16x27x

18x32x

155x

EBIT / Interest Expenses EBITDA / Interest Expenses

+382%

2011 2012 2013 2014 20150.0x

0.1x

0.2x

0.3x

0.4x

0.5x

0.6x

0.7x

0.8x

0.9x

1.0x

0.8x

0.6x

0.9x

0.2x

0.0x

Total Debt/EBITDA Polynomial ( Total Debt/EBITDA)

Solvency Ratios

Solvency Ratios

Liquidity Ratios

Liquidity Ratios


Capital Structure

2011 2012 2013 2014 2015 2016 $-

$200 $400 $600 $800

$1,000 $1,200 $1,400 $1,600 $1,800 $2,000

0%

Total Debt Total Common Equity

Bonds and Notes

Revolving Credit

$- $200 $400 $600 $800 $1,000 $1,200

$5.60

$1,000.00

$1,214$1,360

$1,542$1,369

$1,594$1,839

2011 2012 2013 2014 2015 2016

$(200)

$-

$200

$400

$600

$800

$1,000

$1,200

$168.71 $145.73

$701.48

$442.72

$1,048.30

$388.02

Free Cash Flow Capital Expenditure

2011 2012 2013 2014 2015 $-

$50

$100

$150

$200

$250

$300

$350 $324 $324 $317

$139

$6

$266 $276 $282

$126

$5

Total Principal Due Total Debt Outstanding

- 5554%

2011 2012 2013 2014 2015 $-

$1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000

$2,458 $2,716

$4,671

$6,672

$4,713

$2,596 $2,921

$5,073

$7,241

$5,661

Enterprise Value Market CapitalizationMoving average (Market Capitalization)

Capital EV – Market Cap

DebtFCF - CAPEXTotal Debt


Growth Outlook

2011 2012 2013 2014 2015 2016$0

$200

$400

$600

$800

$1,000

$1,200

$343 $456

$324

$571

$732

$1,074

$323 $428

$292

$539

$699

$1,043

$218 $304

$175

$340

$652 $708

EBITDA EBIT Net Income2011 2012 2013 2014 2015 2016 2017$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$743.18

$916.08

$1,116.98

$1,288.52

$1,465.76$1,594.66

$1,684.68

+115%

2011 2012 2013 2014 2015 2016 $-

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$156 $195

$394 $381

$453

$326

$175 $173

$299

$243 $245

$157

Selling General & Admin Expenses R & D Expenses

R&D +73%

2011 2012 2013 2014 2015 2016 $-

$2

$4

$6

$8

$10

$12

$14

$16

$3.67

$5.71

$3.28

$6.28

$12.72

$14.78

+303%

Total Revenue Income Comparison

Diluted EPS SG&A - R&D

Valuation Analysis


Fundamental Analysis

Profitability

2011 2012 2013 2014 2015 2016

Gross Margin % 88.0% 87.0% 88.3% 90.2% 95.3% 95.6%

EBITDA Margin % 46.2% 49.7% 29.0% 44.3% 49.9% 67.4%

Operating Margin % (EBIT) 43.4% 46.8% 26.2% 41.8% 47.7% 65.4%

Pretax Margin % 40.3% 48.1% 25.0% 40.8% 71.3% NA

Net Income Margin % 29.3% 33.2% 15.6% 26.4% 44.5% 44.4%

Management Effectiveness

2011 2012 2013 2014 2015 2016

Return on Assets % 13.7% 17.0% 9.8% 17.0% 21.5% 29.4%

Return on Capital % 16.8% 20.8% 12.6% 23.1% 29.5% 39.1%

Return on Equity % 23.7% 30.0% 14.9% 27.2% 46.0% 42.8%

Debt

2011 2012 2013 2014 2015 2016

Total Debt/Equity 28.0% 25.5% 22.4% 10.2% 0.3% N/A

2016 increase in margins

2016 higher compared to previous years

2016 No Debt


Comparable Analysis – Part 1

United Therapeutics Narrow Competitors Industry

Management Effectiveness

ROA 29.40% 8.3% 7.3%

ROE 39.07% 25.6% 20.4%

ROC 42.84% 14.8% 11.5%

Financial Strength

Current Ratio 4.4x 3.2x 2.3x

Quick Ratio 4.0x 2.7x 1.7x

Debt/Equity 0.3% 87.5% 134.9%

Profitability Ratios

Gross Margin 95.6% 81.6% 59.6%

EBITDA Margin 65.4% 25.1% 22.5%

Operating Margin 65.4% 21.5% 16.8%

Pretax Margin 71.3% 19.9% 14.0%

Profit Margin 39.6% 15.5% 11.5%

Positive and high return

Low debt compared to its peers

High performance compared to its peers


Comparable Analysis – Part 2United

Therapeutics Actelion Alexion Pharmaceuticals

Regeneron Pharmaceuticals

P/E 9.00x 24.89x 52.66x 59.84x

Price/EBITDA 5.54x 19.47x 29.12x 32.16x

Price/Sales 3.73x 7.33x 9.35x 8.93x

Price/Book 3.08x 12.71x 3.24x 9.84x

Price to FCF 13.04x 21.33x 51.40x 50.53x

EV/EBITDA 4.1x 18.4x 29.5x 30.4x

P/E Price/EBITDA Price/Sales Price/Book Price to FCF EV/EBITDA0x

10x

20x

30x

40x

50x

60x

70x

United Therapeutics Actelion Alexion Pharmaceuticals Regeneron Pharmaceutcial

ActelionMarket Cap: 20,265.2 MTicker: ATLN

Biopharmaceutical company, discovers, develops, and commercializes drugs for unmet medical needs, such as PAH.

Alexion PharmaceuticalsMarket Cap: 27,360.5 MTicker: ALXN

Biopharmaceutical company, develops and commercializes life-transforming therapeutic products.

Regeneron PharmaceuticalsMarket Cap: 40,302.9 MTicker: REGN

Discovers, invents, develops, manufactures, and commercializes medicines for the treatment of serious medical conditions worldwide

Price Multiples


Valuation Analysis

DCF Value at 3.7x Exit EBITDA Range

DCF Value at 1.5% Perpetuity Range

52 Week Market High/Low

P/E P/B Average $90.00

$110.00

$130.00

$150.00

$170.00

$190.00

$155.72

$167.75

$97.52

$119.72

$132.38 $134.62

$174.60

$193.74

$164.04

$149.38

$136.72

$163.70

Target Price $149.16

Assumptions EV/EBITDA 4.4x - 3.9x EV/EBIT 5.8x - 5.2x P/E 7.3x - 6.6x P/FCF 0.2x - 0.1x

DCF Assumptions Growth Rate 1.50% Implied TV exit EBITDA multiple 4.52x Exit Multiple 3.7x

Weighted Average Cost of Capital Cost of debt 0.0% Tax rate 35.8% Risk free rate 2.2% Beta 1.33 Market Return 9.0% Cost of equity 11.3% Cost of capital (WACC) 11.26%

Recommendation

BUY Target Price $ 149.16

Current Price $ 134.55

Upside 11%

Football Field Analysis

Summary


Key Points

DCF Value at 3.7x E

xit EBITD

A Range

DCF Value at 1.5% Perpetuity

Range

52 Week M

arket H

igh/Low P/E P/B

Average $90

$110

$130

$150

$170

$190

$155.72 $167.75

$97.52

$119.72

$132.38 $134.62

$174.60

$193.74

$164.04

$149.38

$136.72

$163.70

Target Price $149.16

Football Field Analysis

P/E Price/EBITDA Price/Sales Price/Book Price to FCF EV/EBITDA0x

10x

20x

30x

40x

50x

60x

70x

United Therapeutics Actelion Alexion Pharmaceuticals Regeneron Pharmaceutcial

Price Multiples

2011 2012 2013 2014 2015 2016 2017$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$743.18

$916.08

$1,116.98

$1,288.52

$1,465.76$1,594.66

$1,684.68

+127%

Total Revenue

2011 2012 2013 2014 20150%

5%

10%

15%

20%

25%

30%

35%

40%

45%

37.5%33.4%

39.7%

34.1%

27.3%28.0%25.5%

22.4%

10.2%

0.3%

21.9%20.3% 18.3%

9.2%

0.3%

Total Liabilities/Total Assets Total Debt/Equity Total Debt/Capital

Solvency Ratios

Appendix


2011 2012 2013 2014 2015 2016 Revenue 741.1 906.1 1,106.9 1,279.5 1,460.6 1,594.0 Other Revenue 2.1 10.0 10.0 9.0 5.2 0.7 Total Revenue 743.2 916.1 1,117.0 1,288.5 1,465.8 1,594.7

Cost Of Goods Sold 88.9 119.3 131.1 125.9 69.0 69.6 Gross Profit 654.3 796.8 985.9 1,162.6 1,396.7 1,525.0

Selling General & Admin Exp. 156.5 194.9 394.0 381.3 452.6 325.9 R & D Exp. 175.0 173.4 299.3 242.5 245.1 156.6 Depreciation & Amort. - - - - - - Other Operating Expense/(Income) - - - - - -

Other Operating Exp., Total 331.5 368.3 693.4 623.8 697.7 482.5

Operating Income 322.8 428.5 292.5 538.8 699.0 1,042.5

Interest Expense (21.4) (16.6) (18.1) (17.6) (4.7) (2.2) Interest and Invest. Income 3.5 - - - - - Net Interest Exp. (17.9) (16.6) (18.1) (17.6) (4.7) (2.2)

Other Non-Operating Inc. (Exp.) (0.7) 4.7 4.5 4.0 0.2 4.5 EBT Excl. Unusual Items 304.1 416.5 278.9 525.2 694.4 1,044.7

Impairment of Goodwill - - - - - - Gain (Loss) On Sale Of Assets - - - - 350.0 0 Asset Writedown - (6.8) - - - - Insurance Settlements - 31.0 - - - - Other Unusual Items (5.0) - - - - - EBT Incl. Unusual Items 299.1 440.7 278.9 525.2 1,044.4 1,044.7

Income Tax Expense 81.9 136.2 104.3 185.1 392.8 336.7 Earnings from Cont. Ops. 217.2 304.4 174.6 340.1 651.6 708.0

Earnings of Discontinued Ops. 0.6 - - - - - Extraord. Item & Account. Change - - - - - - Net Income to Company 217.9 304.4 174.6 340.1 651.6 708.0

Minority Int. in Earnings - - - - - - Net Income 217.9 304.4 174.6 340.1 651.6 708.0

Income Statement


Balance Sheet 2011 2012 2013 2014 2015 2016 ASSETS Cash And Equivalents 162.7 154.0 284.3 397.7 831.8 953.0 Short Term Investments 240.8 325.2 409.6 297.8 122.0 79.6 Total Cash & ST Investments 403.5 479.2 693.9 695.5 953.8 1,032.6

Accounts Receivable 88.7 116.6 126.3 162.3 192.8 224.6 Total Receivables 88.7 116.6 126.3 162.3 192.8 224.6

Inventory 46.0 37.3 47.8 66.9 81.3 92.4 Prepaid Exp. 9.9 - - - - - Deferred Tax Assets, Curr. 8.2 - - - - - Other Current Assets 6.2 35.4 46.4 32.8 47.4 36.4 Total Current Assets 562.5 668.5 914.4 957.6 1,275.3 1,386.0

Gross Property, Plant & Equipment 419.3 531.7 571.2 613.4 650.7 - Accumulated Depreciation (53.3) (78.0) (106.2) (135.0) (154.9) - Net Property, Plant & Equipment 366.0 453.7 465.0 478.4 495.8 488.4

Long-term Investments 343.9 305.7 448.1 122.7 175.2 2.3 Goodwill 8.1 10.5 10.7 10.3 10.3 10.3 Other Intangibles 14.0 5.9 3.4 19.2 18.1 23.7 Deferred Tax Assets, LT 190.7 150.1 192.7 198.3 192.7 188.8 Other Long-Term Assets 32.8 32.2 53.3 97.9 17.1 169.7 Total Assets 1,518.1 1,626.6 2,087.6 1,884.4 2,184.4 2,269.2

LIABILITIES Accounts Payable 47.3 10.2 6.7 7.0 7.5 119.0 Accrued Exp. 137.1 148.4 373.5 360.5 385.2 134.7 Curr. Port. of LT Debt - 1.3 282.5 126.4 5.4 - Other Current Liabilities 28.2 16.9 25.0 10.4 42.8 60.9 Total Current Liabilities 212.6 176.8 687.7 504.3 440.8 314.6

Long-Term Debt 265.6 275.0 - - - - Pension & Other Post-Retire. Benefits 33.0 47.2 - - - - Other Non-Current Liabilities 58.4 43.6 140.6 137.7 155.1 115.9 Total Liabilities 569.6 542.6 828.3 642.1 595.9 430.5

Common Stock 0.6 0.6 0.6 0.7 0.7 0.7 Additional Paid In Capital 992.7 1,015.8 1,057.2 1,376.1 1,790.6 1,836.7 Retained Earnings 249.0 553.5 728.0 1,068.1 1,719.8 2,323.2 Treasury Stock (283.0) (471.0) (513.4) (1,185.8) (1,902.1) (2,305.1) Comprehensive Inc. and Other (10.9) (15.0) (13.2) (16.7) (20.4) (16.8) Total Common Equity 948.5 1,084.0 1,259.3 1,242.4 1,588.6 1,838.7

Total Equity 948.5 1,084.0 1,259.3 1,242.4 1,588.6 1,838.7

Total Liabilities And Equity 1,518.1 1,626.6 2,087.6 1,884.4 2,184.4 2,269.2

healthcare_fall2016_unitedtherapeutics

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