United Therapeutics Is a Value Investor's Biotech Dream

A $5 billion biotech with incredible profit margins could be worth $20 billion in a decade

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Apr 28, 2016
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United Therapeutics (UTHR, Financial) is a biotech headquartered in Silver Spring, Maryland, just outside of Washington, D.C.

United Therapeutics dominates the market for pulmonary arterial hypertension, or PAH, a type of high blood pressure that affects arteries in the lungs and in the heart. This is a dangerous and significant medical issue for society, which means money will be coming in for a long time as the company enjoys a solid economic moat.

While the stock has a fairly sizable short interest (20%), from a numbers standpoint it’s rock solid –Â close to $1 billion in cash, negligible debt, with gross profit margins above 95% –Â and it’s consistently delivering a return on equity north of 50%. Again, these are not one-time annual numbers; these have been consistent for more than a decade, which paints a very pretty picture for the company. Its key growth metrics are up approximately tenfold since 2006.

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United Therapeutics headquarters in Silver Spring, Maryland

2006

  • Revenue: $160 million.
  • Net income: $74 million.
  • Book value: 4.76.
  • Capex: $16 million.

TTM

  • Revenue: $1.46 billion.
  • Net income: $652 million.
  • Book value: 34.72.
  • Capex: $50 million.

The problem with biotech and health care in general (aside from insurance services) is the need for regular innovation, which drags down net profits in the long term.

United Therapeutics continues to show outstanding growth. In the last quarter alone, sales grew 17% year over year, and both of its legacy products, Remodulin and Tyvaso, produced gains. More importantly, its newer drug, Adcirca, which is often compared to Cialis and can be orally ingested, expanded sales by 25% last quarter. However, the crown jewel for the company is Orenitram.

United Therapeutics' management expects to add 1,000 new patients a year reaching an ultimate goal of around 5,000 patients, at which point Orenitram would generate nearly $1 billion a year, up substantially from its current $150 million. The company currently does $1.5 billion in revenues; if successful with Orenitram, that rate will nearly double at the same profit margins.

Add in multiple expansion, and the stock could be $200 to $250 in the next five years.

The company reported numbers Thursday along with a major change in leadership. Both Roger Jeffs (Co-CEO) and David Zaccerdelli (COO) stepped down while Martine Rothblatt became the sole chief executive officer, and Michael Benkowitz was promoted to president and COO.

On the numbers front, United Therapeutics continues to pound out cash. Net income came in at $235 million on $369 million in revenue with massive sales increases in the Orenitram and Unituxin drugs, up 60% and 92%.

What’s more important here is that, despite missing analysts estimates, the results demonstrate a very strong future for the company’s profit stream and share value; 12.7% growth year over year in revenue and turning around the negative profit numbers from a year ago are big wins for the company.

This is a stock that has 100% to 200% return potential along with impeccable fundamentals. Chances are it won’t keep up the torrid pace of the last decade but even 12% year-over-year growth will be enough to help shareholders beat the Standard & Poor's 500.

Disclosure: I do not currently have a position in United Therapeutics.