Unilife Management Discusses Q3 2013 Results - Earnings Call Transcript

May. 9.13 | About: Unilife Corporation (UNIS)

Unilife (NASDAQ:UNIS)

Q3 2013 Earnings Call

May 09, 2013 4:30 pm ET

Executives

Todd Fromer - Managing Partner

Alan D. Shortall - Chief Executive Officer, Executive Director, Member of Strategic Partnerships Committee and Chief Executive Officer of UMSL

R. Richard Wieland - Chief Financial Officer and Executive Vice President

Analysts

Keith Albert Markey - Griffin Securities, Inc., Research Division

Anthony Petrone - Jefferies & Company, Inc., Research Division

Danielle Antalffy - Leerink Swann LLC, Research Division

Jeremy Feffer - Cantor Fitzgerald & Co., Research Division

Jeffrey S. Cohen - Ladenburg Thalmann & Co. Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Unilife Corporation Fiscal 2013 Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Todd Fromer. Sir, you may begin.

Todd Fromer

Thank you. Good afternoon, everyone, and good morning to our Australian supporters. Thank you for joining us for the Unilife Corporation Fiscal 2013 Third Quarter Conference Call.

Before we begin today, I would like to remind everyone that this conference call contains forward-looking statements. All statements that address operating performance, events or developments that we expect or anticipate to occur in the future are forward-looking statements. These forward-looking statements are based on management’s beliefs and assumptions and not on the information currently available to our management.

Our management believes that these forward-looking statements are reasonable as and when made. However, you should not place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We do not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results, events and developments to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Item 1A Risk Factors and elsewhere in our annual report on Form 10-K and those described from time to time in other reports, which we filed with the Securities and Exchange Commission.

With nothing further, I would like to now turn the call over to Mr. Alan Shortall, Chief Executive Officer of Unilife Corporation. Alan, the floor is yours.

Alan D. Shortall

Thank you, Todd. Good afternoon and good morning to those in Australia. Before we discuss the quarter, I'm excited to tell you that we are getting ready to announce our first major long-term supply contract for the Unifill syringe. This is a significant multiyear commercial supply contract with a major pharmaceutical customer that generates revenue immediately. The negotiations for this agreement are complete. All terms have been agreed upon. The execution copy is being routed for signature by both parties.

This agreement will establish Unilife as one of the leading suppliers of prefilled syringes in our industry. It also reaffirms all aspects of our business model. We are scheduling a press conference in New York City to make the formal announcement in the next couple of weeks. This is the first in a series of significant revenue-generating contracts that are ready to emerge from our commercial pipeline. Revenue associated with these agreements will be recognized from the July quarter onwards.

I have always said that 2013 was going to be the inflection point for our business. I am very pleased that we have turned the corner. We are now entering a period of hyper growth that will progressively build through fiscal year 2014 and beyond. I expect that over the coming year, you will see the focus of our public discussions begin to shift from the commercial pipeline to our financials and business growth. We, therefore, plan to begin providing guidance sometime during fiscal 2014. This guidance will provide greater clarity to analysts and investors on our business trajectory and the revenues generated by these long-term contracts.

This supply contract for Unifill is the second in a series of agreements that we expect to announce and generate immediate revenue from. The first of these agreements was announced last month, a 15-year customization and commercial supply contract for the EZMix dual-chamber syringe that will generate up to 10 -- $110 million in cumulative revenue. I consider that some of the additional agreements announced over the coming months will be of an even greater magnitude.

Given the significance and quantum value of what's been negotiated, it is important that we take the time to ensure each agreement delivers maximum benefits for our shareholders. In some cases, customers are targeting our products for an entire portfolio of their injectable drugs. Other customers are targeting our products for high-value drugs as part of a life cycle management strategy to defend market share against branded biosimilar or generic competition. These upcoming agreements encompass all products in our broad portfolio of injectable drug delivery systems.

With so many transformational agreements generating revenue immediately, we have no intention of doing any secondary stock offering that would cause dilution to existing shareholders. We have, therefore, agreed to terms with a major U.S. life science financing firm for a debt funding program, which we expect to finalize later this month. This program sufficiently strengthens our balance sheet during this period in which we transition to a strong and accelerating revenue growth.

I would now like to hand the call over to our CFO, Rich Wieland, to walk us through the financial year third quarter results. Up to you, Rich.

R. Richard Wieland

Thanks, Alan. As reported in our press release earlier today, our financial results for the third quarter of fiscal 2013 include revenues of $0.7 million compared to $1.3 million for the third quarter of fiscal 2012. The decrease relates to the recognition of $0.6 million of clinical development revenue from a global pharmaceutical company related to a specialized drug device for targeted organ delivery in the third quarter of fiscal 2012.

Total net loss for the third quarter ended March 31, 2013, was $14.1 million compared to a net loss of $14.9 million for the same period last year. The decline in net loss is primarily attributable to the decrease in R&D expenses of $1.2 million, as well as the decline in our general and administrative expenses of $0.4 million, partially offset by the decline in revenue as previously mentioned. We also recognized additional depreciation and amortization expense of $0.2 million in the third quarter as compared to the prior year.

Adjusted net loss for the third quarter was $9.4 million compared to an adjusted net loss of $10.7 million for the same period in fiscal 2012. Adjusted net loss excludes share-based compensation, depreciation and amortization and interest expense.

As Alan said previously, in recognition of the advanced status of some of these revenue-generating agreements and our strong confidence in these announcements being realized in the near to medium term, we're carefully managing our cash position to minimize dilution to existing shareholders. As of March 31, 2013, we held $9.6 million in cash, which will increase following the completion of a debt financing program and the immediate generation of revenue from customers.

Last year, we expressed a commitment to reduce operating expenses. I am pleased to report that we continue to make progress towards this goal, as indicated by the $1.9 million or 15.7% of savings realized in our most recent quarter ending March 31, 2013, when compared to the operating expenses, excluding the noncash charges incurred in the fourth quarter ended June 30, 2012. This represented a 6.4% savings when compared against our average quarterly operating expense, excluding noncash charges during fiscal 2012.

Now I'd like to turn the call back over to Alan for closing remarks.

Alan D. Shortall

Thank you, Rich. So in summary, I would like to thank you all for your patience and support, as we have worked towards this key turning point in our history. From this point forward, we expect to generate accelerating recurring revenue from a large and expanding base of customers. I look forward to meeting some of you in the next couple of weeks at our press conference in New York City, where we will announce more details on this major upcoming commercial supply contract for the Unifill syringe.

With that, I would now like to open the call up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Keith Markey of Griffin Securities.

Keith Albert Markey - Griffin Securities, Inc., Research Division

Alan, I was just wondering, when you signed it, do you have to -- do you anticipate expanding capacity for the Unifill?

Alan D. Shortall

Yes, Keith, considerably so.

Keith Albert Markey - Griffin Securities, Inc., Research Division

Okay. So are we talking 1 or 2 of the production lines that you might have to add? Or...

Alan D. Shortall

I think the easy way to say that, Keith, is that this supply agreement will put us as one of the leading suppliers of prefilled syringes in the world, not in safety prefilled, I'm talking about prefilled syringes. So it'll be multiple lines, as we go forward, with the demand that we're now seeing for the Unifill.

Keith Albert Markey - Griffin Securities, Inc., Research Division

Fair enough. And can you tell us whether or not this covers a single drug or more than one?

Alan D. Shortall

I'd just say that I can't disclose that. I will do at the -- as it become very obvious to the press conference.

Keith Albert Markey - Griffin Securities, Inc., Research Division

Okay. That sounds fair. One other question. Will the debt be used for expanding your production capacity?

Alan D. Shortall

The debt will be used, going forward, to operational expenses and towards increasing the production capacity, although there are other facilities available to us in terms of equipment financing, et cetera. And some of these deals that we have in the pipeline that you'll see going to market, between now and the end of the year, will have their funding attached to them also.

Operator

Our next question comes from Anthony Petrone of Jefferies.

Anthony Petrone - Jefferies & Company, Inc., Research Division

Alan, a question on the EZMix deal and the pending Unifill deal. A few months ago, the company had disclosed a portion of its pipeline in a press release around its annual shareholder meeting. I'm wondering if the EZMix deal and the pending Unifill deal are captured in any of those disclosed deals that you had out there earlier this year?

Alan D. Shortall

Yes, they would both be in that. And let me add, Anthony, I believe we're very much on track to deliver what we actually said at the AGM in terms of deals and possibly more even.

Anthony Petrone - Jefferies & Company, Inc., Research Division

Okay. So when we look at -- take the Unifill deal first, the pending deal, does that include or do you foresee that including any upfront payments, or is it going to be similar to EZMix where we'll sort of get the lifetime length of the contract, but not necessarily when we would get revenue flow from it?

Alan D. Shortall

We get immediate revenue flow. There will be upfront funding attached to it, and that's why the combination of that with the debt funding will put us -- our balance sheet in a very strong place.

Anthony Petrone - Jefferies & Company, Inc., Research Division

And when you say immediate revenue flow, that's commercial revenue flow and not anything on the development side?

Alan D. Shortall

I can't answer that, Anthony. It'll become obvious at the press conference. But it will have a significant contribution to our cash position.

Anthony Petrone - Jefferies & Company, Inc., Research Division

All right. And the last one for me, and I'll hop off. If we look at '14 and '15 -- fiscal '14 and '15, how should we be thinking about gross margins overall? Just given the mix of announced deals, they all seem to be for different products, which each carry a different margin structure. So how should we be thinking about the overall gross margin structure as revenues start to come in?

Alan D. Shortall

Well, rather -- thank you, Anthony.I'd rather look in the gross margin because of the various products we have and the various deal structures we have. I think it's more important to focus on operating margin. As we go forward in the next 3, 4 years, we're going to be looking at a blended operating margin north of 40%. I mean, you put that in conjunction with 10-, 12-, 15-year supply contracts, this becomes a very attractive robust financial model.

Operator

Our next question comes from Danielle Antalffy of Leerink Swann.

Danielle Antalffy - Leerink Swann LLC, Research Division

Just a quick question -- congrats on -- seems like momentum is starting to pick up on the deal front. Just wondering, Alan, as the momentum starts to pick up, have you noticed any change in the other negotiations that are ongoing, i.e., you are -- now that you guys have a little bit more leverage and you're starting to build a track record here, do you see that helping you move the other negotiations along maybe faster?

Alan D. Shortall

Yes, Danielle, I probably have got a very good understanding how you felt that sometimes in your life being the prettiest woman at the ball and everybody wanting to dance with you. We've actually got -- the momentum has switched in the marketplace, where the pharmaceutical company is now realizing the level of contribution we can make to strengthen their market share, increase their market share, increase their revenues. And there's somewhat of an urgency about trying to actually get the business in place for this to protect themselves from their competition getting there before them. So we increased our commercial sales team in October last. We've now got 5 of the top salespeople, and these are seasoned MBA professionals being sent into the pharmaceutical industry for the last 10 or 20 years. And the momentum has switched completely in the market for us.

Danielle Antalffy - Leerink Swann LLC, Research Division

Great. And, Alan, I wish I was the prettiest girl at the ball. Just a quick question on the manufacturing front, appreciating you do have to build capacity. The lines that you have up now, I mean, what are yields on those lines? And sort of -- I'm just trying to get a sense of how comfortable you are with the deals that you sign now about your ability to supply.

Alan D. Shortall

Well, yes. Look, the current supply line, the first line we have in place with Unifill is very capable of producing 70 million units a year. The next line we put in place will be approximately 180 million to 200 million capacity, and each line, going forward, will have a similar capacity. There's not a technical challenge now in ramping our production. It's really one of replication going forward, so it's not going to be difficult for us to do so.

Operator

Our next question comes from Jeremy Feffer of Cantor Fitzgerald.

Jeremy Feffer - Cantor Fitzgerald & Co., Research Division

I just wanted to follow-up on Danielle's question on capacity. So just to be clear, the fact that you have to ramp up capacity is not hindering any further negotiations you have with other potential partners, correct?

Alan D. Shortall

No, not all. It'll be just incremental going forward, and we have a plan in place. We can put a line in place with, I'll just say, average, about 180 million to 200 million unit capacity and put that in place within 12 months. So it won't be difficult to meet the demand going forward.

Jeremy Feffer - Cantor Fitzgerald & Co., Research Division

Okay. And then on the EZMix deal, at what point will you be able to disclose more details, i.e., either the name of the partner or the drug category?

Alan D. Shortall

This is always a challenge for us. The pharmaceutical companies are notoriously private in terms of their business and not wanting the competition to know it. And obviously, we're always eager, as much as we can, to give as much information to the market, particularly with these major pharmas where we're dealing with them. With that in mind, it's the customer that makes the decision as to what we can and can't disclose. And obviously, any press release we put out, whether we actually mention the customer are not, we always get clearance from that customer in terms of what the content is. So this is -- on this basis, it was the customer's requirement to not to give too much any more information than we did. But as the pharmaceutical company moves forward, I think that might change in the next 6 to 12 months, but it'll be their decision. But I do believe -- I mean, to be honest, Jeremy, at the moment, we're sitting with a hand of aces at this stage. I wish I could share with the market more of what really is going on in the background, but some of these deals are going to be rolling out over the next few months and certainly before -- between now and the end of the year, there'll be a number of what I would consider very, very large transactions that are going into the market. So with that in mind -- and I believe with those larger transactions, we will be in a position to be able to actually announce the pharmaceutical company name, et cetera, with them. It varies from deal to deal.

Jeremy Feffer - Cantor Fitzgerald & Co., Research Division

Okay. No. I appreciate that color. And then just one final one for me. Again, just so I'm clear, this new debt facility that you'll announce shortly, you're saying that between this facility and the contract that you will announce in the coming weeks should be sufficient now to carry you through commercialization.

Alan D. Shortall

I'm not going to say definitively, but we have no intention of doing any follow-on offering. And I believe this funding will get us definitely through well into next year. And with some of the deals coming through, I believe -- there'll be likelihood that it would see us right through commercialization all the way.

Operator

Our next question comes from Jeffrey Cohen of Ladenburg Thalmann.

Jeffrey S. Cohen - Ladenburg Thalmann & Co. Inc., Research Division

So could give you us a little bit of color on pipelines as compared to last quarterly's call, besides the EZMix and this recently announced deal?

Alan D. Shortall

Well, as I said earlier, we will be able -- I believe we will meet the target we put out at the annual general meeting. I think that number is around 12. We've put 2 already. Unfortunately, it'd be very nice if we could actually space these very timely, but unfortunately, it doesn't always work that way. I do believe we've got a number that are in the pipeline is going to come out fairly quickly now. But these are for -- right across our whole platform range, where we've got 6 platforms now. You're going to see these deals coming out for pretty much all across our platform. And then some of these deals will be very, very large deals. And we know we've been selected. We know there's no doubt in the -- in our mind or in the pharmaceutical companies' minds in terms of these deals being completed. And in fact, in some cases, pharmaceutical companies have asked us to continue to work for us. We get agreements in place and, of course, to build relationship. We're very happy to do that. So you're going to see -- and the deal with -- last year, we put up the EZMix. It's a very good indication of the substance of these deals for a 15-year supply contract. So not many companies are actually going to have a 15-year supply contract in place, heading towards blended operating margins north of 40% and then having royalties from the sales of therapeutics as well. That's a really good blend.

Jeffrey S. Cohen - Ladenburg Thalmann & Co. Inc., Research Division

But correct me if I'm wrong, the EZMix deal is for a compound still in clinical development?

Alan D. Shortall

It's a -- it's an approved -- it's already approved drug. And there is some clinical requirement around it, but I can't say anymore than that. But it's at very, very, very low risk.

Jeffrey S. Cohen - Ladenburg Thalmann & Co. Inc., Research Division

Got it. Okay. And could you -- Richard, could you talk about the cash burn from this quarter, please?

R. Richard Wieland

The cash burn for the quarter was roughly equivalent to the last quarter, is what I can say. As I mentioned in the comments, we actually -- burn is down a little bit to reduce R&D and G&A.

Jeffrey S. Cohen - Ladenburg Thalmann & Co. Inc., Research Division

Okay. But it's not specifically broken out?

R. Richard Wieland

It was in the press release.

Jeffrey S. Cohen - Ladenburg Thalmann & Co. Inc., Research Division

It is. Okay. And could you talk about the size of the debt financing? What size debt financing do you perceive as doing in order to facilitate the ongoing operations?

Alan D. Shortall

I can't release that information at the moment. That will be -- when that transaction is completed the next few weeks, that will be released. Well, it's enough, as I said earlier in speaking to Jeremy, that it'll be enough, combined with some of the funds that are going to be coming in from the deals, to see us into next year and very likely, in fact, might see us all the way through into cash flow positive with some of the deals and some of the -- that we're currently negotiating with the fees attached to them.

Jeffrey S. Cohen - Ladenburg Thalmann & Co. Inc., Research Division

Okay. Got it. And for -- you're saying -- just a couple more questions. So this deal for the syringes, is this for -- it's for all prefilled syringes?

Alan D. Shortall

I'm not sure I understand you.

Jeffrey S. Cohen - Ladenburg Thalmann & Co. Inc., Research Division

The deal that you're preannouncing today.

Alan D. Shortall

The deal that we will be announcing...

Jeffrey S. Cohen - Ladenburg Thalmann & Co. Inc., Research Division

Is it for Unifill?

Alan D. Shortall

For Unifill.

Jeffrey S. Cohen - Ladenburg Thalmann & Co. Inc., Research Division

It's for Unifill, not prefilled?

Alan D. Shortall

Well, Unifill is our safety integrated prefilled syringe.

Jeffrey S. Cohen - Ladenburg Thalmann & Co. Inc., Research Division

But the filling will not be done in New York.

Alan D. Shortall

No, we don't do the filling. What we do is...

Jeffrey S. Cohen - Ladenburg Thalmann & Co. Inc., Research Division

That's right.

Alan D. Shortall

We actually supply 3 components to the pharmaceutical companies. The barrels, the plunger seal and the plunger, separately. So the barrels then go into the pharmaceutical company's filling division, they fill them, then their robots put in the seal and then put in the plunger. They complete the assembly themselves.

Jeffrey S. Cohen - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And for the fourth quarter, should we anticipate any material revenues from the company?

Alan D. Shortall

We haven't given guidance, and we will be recognizing revenue going into this quarter. But going into the fourth quarter 2014 is where you'll start to see a significant ramp-up in revenues.

Operator

And at this time I'm not showing any further questions. I'd like to turn the call back to management for any further remarks.

Alan D. Shortall

Thank you. Well, thank you, everybody, for joining us today. As I said, this is a very exciting time for us. We have turned the corner. And it's nice to be sitting here with the aces in our hand. Thank you, everybody.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.

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