By Ivan Deryugin
Earlier this week I had the pleasure of speaking with Alan Shortall, President and CEO of Unilife (UNIS), about the company's short and long-term prospects. Over the course of the next few months, a confluence of factors, including a commercialization ramp and a looming short squeeze, are likely to create value for Unilife investors. With UNIS down over 25% in the last six months alone, there is value to be found in the shares of this company.
Unilife's predecessor company was founded in 1985 and is currently based in York, Pennsylvania. The company develops a variety of injectable drug delivery systems, and while it has yet to begin generating revenue from meaningful sales of its delivery systems and syringes, 2013 is poised to be a pivotal year for Unilife as it recovers from past stumbles and begins to realize its potential. As Mr. Shortall noted, Unilife stands ready to take advantage of several key healthcare trends, trends that stand to benefit Unilife and its investors over the course of the coming months.
As healthcare costs continue to soar, both here in the United States and across the world, every player in the healthcare market is looking for new ways to drive down costs while preserving or improving the quality of care that patients receive. Self-administered and self-injected drugs are becoming more and more prevalent; according to Ernst & Young, up to 50% of healthcare will be administered outside of the traditional healthcare system (hospitals, clinics, etc…) by 2020. An accompanying shift toward biologics will also begin to change the American healthcare system. According to Mr. Shortall, there are currently around 1,000 different biologics in development in the pipeline of American pharmaceutical companies alone, and these biologics are more challenging to commercialize than traditional drugs. Many are complex and viscous compounds, requiring new methods of delivery. Enter Unilife. The company's Unifill and EZMix syringes allow patients to treat themselves quickly and easily. But Unilife's business model is not simply about helping patients. Rather, it's about helping pharmaceutical companies meet their unmet needs, and this is how Unilife plans to deliver value for its customers and investors.
Injecting Itself into the Pharmaceutical Supply Chain
As I spoke with Mr. Shortall, I came to see him as an executive with a clear vision as to how his company will succeed and a plan to turn that vision into a reality. While Mr. Shortall was certainly enthusiastic about the quality of life improvements that these syringes and delivery systems can have for patients, he was even more excited about the potential that these products hold for pharmaceutical companies. Mr. Shortall recounted how a large pharmaceutical company (defined by him as one of the five largest) was developing a new biologic, and was setting up clinical trials for it. However, the mechanism of action for this specific biologic required that the drug be delivered via surgery. This created a variety of complications for the clinical study, especially in recruiting patients (to say nothing of the complexities of managing such a drug post-FDA approval). The company turned to Unilife, awarding it a $1.4 million contract to find a better way. And Unilife delivered, producing an injectable drug delivery system that eliminates the need for surgical administration and allows the timing of delivery during administration. This leads to better clinical outcomes and higher odds of approval.
The crucial element here is perhaps the most easily overlooked: by creating this drug delivery system, Unilife has made it an essential part of the mechanism of action for this biologic, and if and when the drug is approved by the FDA, it will be approved as a "package deal," thereby injecting Unilife into the supply chains of its pharmaceutical customers. Mr. Shortall does not want his company to be another generic medical device company churning out high volumes of low-margin medical products. Rather, he wants Unilife to become an integral part of the pharmaceutical supply chain, and the company already counts Sanofi (SNY) as a customer.
In 2009, Unilife and Sanofi entered a 5-year industrialization agreement. Under the terms of the agreement, Sanofi received exclusive rights to the Unifill syringe in several indications, including antithrombotic agents, vaccines, and four other unnamed indications. Sanofi paid Unilife 17 million euros for this license, which expires on June 30, 2014. Unilife began supplying Sanofi with Unifill syringes in July 2011, and has received over $40 million from the global pharmaceutical company, which is estimated to be the world's largest buyer of prefilled syringes. Other pharmaceutical companies have begun deploying Unilife's technology as well. In early November, Unilife announced that a "global pharmaceutical company" had selected its Precision-Therapy bolus injection system for use in its clinical trial process. Unilife stated that the system is being used in five pipeline programs, with the first being in Phase III trials. Unilife has commenced shipments to the company, and expects to sign a supply agreement with the company, estimated to be worth $10 million over the next 18-24 months. The deal is set to be signed in fiscal 2013 (the company's fiscal year ends June 30). Unilife also stated that full product shipments are likely to commence in 2015, with annual revenue of $50 million per year from shipments of Precision-Therapy bolus injectors alone. The company also stated that it expects between $30-$70 million in supply revenue per drug from this deal. And in December, Unilife announced that a U.S. pharmaceutical company has begun to study its products for use in its clinical trials, as well as existing drugs. While Unilife did not give revenue projections for this deal, the company did state that it expects peak annual demand of 25-35 million injection units from this company alone.
At Unilife's annual meeting, held in late November, the company gave an update on its commercialization efforts. CEO Alan Shortall described five different EZMix programs that the company is working with 21 different customers, across 31 different development programs, and said that 13 of these are set to generate revenue in fiscal 2013, with peak sales estimated at $992 million.
While Unifill is the company's most advanced product, Unilife is developing a variety of other injection systems. EZMix, designed for drug reconstitution, with five different EZMix programs set to begin generating revenue in fiscal 2013 and 2014. The company has one auto-injection platform set to begin generating revenue in 2013, and two in 2014. Four of the company's injection pump programs are set to begin generating revenue in 2013, as are two of its targeted delivery systems, which are designed for the delivery of drugs that require specific delivery sites, such as eye injections. The ramping of Unilife's sales can be seen through consensus estimates for the company's revenue, provided by Reuters (Unilife lost revenue of $5.519 million in fiscal 2012).
According to consensus estimates, Unilife is set to generate $20.1 million in revenue in fiscal 2013 (a growth rate of 264.17%), and $88.4 million in fiscal 2014, which would represent an acceleration of growth to 339.8%. And Cantor Fitzgerald, which has a $7.50 price target on Unilife, models revenue of $500 million by fiscal 2016, and sustainable profitability by the end of fiscal 2014. Unilife lost $0.78 per share in fiscal 2012, and those losses are projected to narrow in fiscal 2013 and 2014, to $0.48 and $0.09 per share, respectively.
Financials & Market Structure: Addressing the Need for Capital
Unilife's stock has been battered over the past year, falling almost 38% as the company depleted its capital reserves investing in future growth. Unilife ended its latest quarter with over $10 million in cash and investments on its balance sheet, and with a quarterly burn rate of over $10 million, it would seem that the company is going to need to raise capital imminently. However, the situation is more complex than it appears to be. Unilife already set up a controlled equity offering agreement for $45 million in early October, and to date has not utilized it according to Mr. Shortall. During our conversation, he stated that he wants to limit dilution as much as possible, and that the company has no immediate plans to issue new stock; if capital is needed, he prefers to issue debt. Unilife ended its latest quarter with over $10 million in debt, of which $6.7 million is due within the next 12 months. The remaining debt is long-term in nature, with maturities in 2020, 2021 and 2031. Mr. Shortall stated that any capital that the company will raise in fiscal 2013 will be minimal, and that a capital raise would be designed to bridge the company to the closing of new supply contracts, which he hopes to announce over the next few months. With shares down sharply over the past year, expectations of a capital raise are likely already priced in. While the Unilife story is a promising one, it is admittedly long-term in nature. However, there are short-term elements at work here as well. As Unilife begins to announce new deals with pharmaceutical companies, a number of factors may lead to a dramatic short squeeze.
A Looming Short Squeeze
Unilife was originally incorporated in Australia in 1985, and the company began trading on the NASDAQ in 2010, having transferred its operations to the United States from Australia. However, Unilife is not a reverse merger shell company (that being said, Australian financial reporting standards are equivalent to those of the United States in terms of rigor, for Australia is a highly stable democracy). Rather, Unilife made the decision to transfer its operations to the United States, for a variety of reasons. The company delisted itself from the ASX, and relisted on the NASDAQ via a traditional listing.
Unilife ended its latest quarter with over $10 million million shares outstanding, and according to the latest NASDAQ data, 10.2 million shares of Unilife were sold short (12.16% of all shares outstanding). While this level of short interest is already relatively high, Mr. Shortall pointed out, correctly in my view, that this data does not tell the whole story. Around 40 million of Unilife's shares are held by Australian investors via over $10 million CDIs, Australia's version of an ADR. While it's possible to convert Unilife's CDIs back into common stock, the process is long and cumbersome, and plays a role in artificially deflating Unilife's trading volume here in the United States (the company's average daily volume over the past 50 trading days has been around 305,000 shares). Mr. Shortall himself owns over 5.4 million shares of Unilife. Excluding restricted stock, he holds 3,158,043 shares, or 3.79% of the company. And Unilife's institutional ownership is highly concentrated. JP Morgan is the company's largest investor and owns over 6.1 million shares of Unilife. The company's five largest institutional investors own 14.9 million shares, or 17.95%. When the nuances of Unilife's ownership structure are taken into account, the company's true short interest is in fact much higher. When accounting for shares held by Australian investors, and Mr. Shortall's stake, Unilife's short interest jumps from 12.16% to over 25%. According to Mr. Shortall, he and what he described as "key investors" own a combined 25 million shares of Unilife. When the company's Australian shares, Mr. Shortall's direct stake, and the holdings of "key investors" are taken into account, Unilife's short interest soars to over 55%. Given that seven of Unilife's 15 largest institutional investors chose to up their stakes during the last few months of 2012 (five maintained their stakes and three decreased their holdings), I do not believe that they will be quick to let go of their shares when the company begins to announce supply deals over the coming months. The nuances of Unilife's capital markets structure are a recipe for a short squeeze, as only around half of Unilife's shares are even available in the United States, and millions of those shares are held by Mr. Shortall himself and long-term institutional investors (Fidelity, which owns 2.4% of the company, has been an investor since May 2011, and JPMorgan has been invested since November 2011).
Unilife offers something for both short-term and long-term investors. The company's stock has been battered over the past year as investors awaited a capital raise, one that has not materialized, nor is likely to materialize. Unilife's CEO has stated that he prefers debt financing to equity financing, and the company is set to begin announcing deals, with Mr. Shortall confident that the company will have announcements to make over the coming months. Unilife's products meet a clear medical need, and pharmaceutical companies are already utilizing Unilife products in both clinical trials and approved drugs. 2013 is likely to be a transformational year, with a number of the company's development programs set to begin generating revenue. And as the company continues to execute on its development strategy, the nuances of its capital markets structure are setting the stage for a short squeeze. In my view, investors could consider adding to or initiating positions in a company whose best days are ahead if it.
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