United Therapeutics (UTHR)


Key Statistics

Enterprise Value =$4.454 billion

Operating Income = $998.2 million

EV/Operating Income = 4.46x

Price/Revenue = 3.06x

Earnings Yield = 13%

Debt/Equity = 10%

The Company

United Therapeutics is a biotech firm founded in 1996 by Martine Rothblatt. Rothblatt’s daughter suffered from pulmonary hypertension (high blood pressure within the arteries of the lung), and she founded United Therapeutics to try to find a treatment. They succeeded in creating Remodulin, which was approved by the FDA in 2002. UTHR sells many other drugs, but Remodulin remains the blockbuster core of the business. In 2017, it represented 39% of total revenue.

More recently, in 2015, the FDA approved one of UTHR’s latest drugs: Unituxin. Unituxin is a treatment for neuroblastoma, cancer affecting the kidney. Children often have this cancer. Unituxin helps the immune system fight cancer.

A few years ago, UTHR was a richly valued growth stock. To put the growth into perspective, in 2002 the company generated $50 million in sales. Last year, sales were $1.7 billion. In 2015, it traded at a P/E ratio of 50.

Since the 2015 peak, the stock is down 17%.

What happened? Several patents expired in 2017 and UTHR is facing increased competition from generics. Growth has slowed down, and the market is worried that there aren’t enough drugs in the pipeline to keep the growth going.

My Take

Growth for UTHR likely won’t continue at the intense pace of the last twenty years. The thing is: at this price; it doesn’t need to. The stock is priced like it is a dying business that is being destroyed by competition as if it is one of my beleaguered retail picks fighting the Amazon juggernaut. In reality, this is a Phil Fisher company trading at a Ben Graham price.

The stock now trades at a P/E of 7.63 (down from its 50x peak in 2015). The average for the biotech industry is 29.45, meaning that UTHR trades at a 74% discount to this. It is also a free cash flow machine generating an 11% yield based on its current enterprise value. The 5-year average P/E for UTHR is about 18.55 (which seems like a proper valuation for a growth company). An increase to 18.55 would be a 143% increase from current levels.

In the most recent quarter, year over year sales was mostly flat, and earnings were down. The recent performance deepens the worries that UTHR’s best days are in the past.

The consensus price implies that UTHR has nothing in the pipeline. In reality, they spent $264 million on research in 2017. They are working on many new drugs, but one of the most exciting areas of research is the manufacturing of organs. They are trying to develop the ability to generate engineered lungs, hearts, and kidneys. If they succeed, such a development could save a tremendous number of lives over the long run and, of course, generate significant business for the company.

UTHR is valued as if it is roadkill. It is priced for a no-growth future. Based on its past results and research pipeline, this seems to me like an unlikely fate. With a solid balance sheet and low valuation, the prospects of a significant decline are low. Meanwhile, any whiff of good news on the research front could send the company to a more normal valuation, potentially a 100%+ gain from current levels.

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