United Therapeutics is Substantially Undervalued, Here’s Why

United Therapeutics is Substantially Undervalued, Here’s Why

Silver Spring, Maryland-based United Therapeutics Corporation (NASDAQ:UTHR) is a biotechnology company with a primary focus on the creation of therapeutic drugs that treat pulmonary arterial hypertension (PAH). The company has four products on the market with the release of its' fourth drug Orenitram in mid 2014; after receiving FDA approval for it in December 2013.

Biotechnology companies often have stock prices that are driven high on one particular dream come true — they’ll surprise shareholders by winning FDA approval. Even if the company is losing hundreds of millions of dollars each quarter, the potential for making a lot of money from a blockbuster drug can keep the stock price sky high.

For dreams realized, look no further than United Therapeutics which has already surpassed this goal with several drugs that rake in, well over a billion dollars in annual revenues. The company brought in $1.1 billion in 2013 and its profit margins were 33 percent in 2012, meaning that it kept a net profit of 33 percent of its revenues (non-GAAP profit margins were near 50 percent in 2013). Unheard for most companies let alone a biotech. United Therapeutics has reported an annual profit for the last four years but despite those financials, its valuation appears drastically low compared to companies in its industry with similar revenues and profits and even money-losing biotechs.

What they're worth

There are several related biotechnology and pharmaceutical companies that have lower financial standings than United Therapeutics but with far greater market valuations.

Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) brought in $1.2 billion in falling annual revenues in 2013 compared to over $1.1 billion in growing revenues for United Therapeutics. Furthermore United Therapeutics has nearly $1 billion in cash and cash equivalents at the end of the 2014 third quarter. Much higher valued Vertex had $1.48 billion stowed away.

But there are some key big differences between the companies.

  • United Therapeutics is making money — and a lot of it, while Vertex is losing money — and a lot of it. 2013 Non-GAAP annual earnings for United Therapeutics was over $544 million while Vertex lost over $203 million in 2013

  • The Price-to-sales ratio for for Vertex Pharmaceuticals is 24.82 versus 6.24 for United Therapeutics.

  • Finally, the most puzzling difference is in the valuation of both companies. Vertex has a market value of approximately $29 billion, more than four times United Therapeutics’ $7 billion valuation.

Similar in valuation is Isis Pharmaceuticals (NASDAQ:ISIS), the companies stock price has surged in the past few months based on positive drug study data.

  • Isis Pharmaceuticals annual revenues in 2013 were $147 million with a net loss of $60.64 million or a loss of close to half of revenues. United Therapeutics made a net profit of $175 million in that same time frame.

  • Isis Pharmaceuticals price-to-sales ratio is 56 versus 6.24 for United Therapeutics.

  • Yet, with consistent annual losses and substantially less revenues, Isis Pharmaceuticals is valued at $8.21 billion versus the $7 billion market value for United Therapeutics.

In the lower-mid range valuation and with five products on the market, BioMarin Pharmaceutical Inc.(NASDAQ:BMRN) brought in nearly $550 million in revenues.

  • Despite an impressive number of approved and marketed drugs, losses have been continuous annually since 2011 for BioMarin and so far for 2014 expect for the last reported quarter where the company managed to squeeze out a net profit of $7.5 million.

  • BioMarin's price-to-sales ratio is 25.85 versus 6.24 for United Therapeutics.

  • At approximately $14.4 billion in market value, BioMarin is more than double the size of United Therapeutics.

Local biotech history

Medimmune was Maryland’s largest independent biotechnology company. At its' height it was the eighth largest biotech in world before it was sold to Astra Zeneca in 2007 for $15.2 billion. At the time of purchase the company's annual revenues was about $1.2 billion with a roller coaster ride of profits and losses.

United Therapeutics has amassed nearly the same amount in revenues but with with four versus two drugs on the market, a promising pipeline outside it's core focus and continuous annual profits.

Furthermore the company has won important court cases against companies that threaten it's current pipeline with generic drugs. In need of more space, it's expanding it's sprawling Silver Spring headquarter campus with an additional large office building planned.

Considering the valuation of related companies past and present, United Therapeutics is substantially undervalued and there is potential upside growth. A conservative estimate for the company’s market value should be at least $15 billion.

Henry Odeniran holds a B.A. In Economics and Geographic Information Science, from the University of Maryland College Park. He has no positions in any stocks mentioned except for United Therapeutics, and no plans to initiate any positions within the next 24 hours of this writing.

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