For Unilife (UNIS) The recently announced Sanofi contract (SNY) should put to rest some of the claims made by the salacious Forbes Article that hammered the stock last week. In this article I'll discuss the recent controversy before giving a background on the business model and outline my thesis why I think UNIS could be worth $5+ a share, assuming it can continue rolling up Pharma contracts as they have done recently.
Recent Controversy: Forbes Article
The Forbes article, in my view, does not really address many issues of the company's business model and provide an objective analysis of the strengths/ weaknesses, but rather spends an inordinate amount of journalistic space focusing on the CEO's alleged past ties to shareholders, own compensation, and general marketing attitude. In my view, while these general issues could be a consideration, the general investment merit of the company should be judged on its track record of execution and business prospects and not solely on personalities or past deeds (or alleged deeds). The fact that the article casually notes that he bears a resemblance to a convict (Tyco) or other off hand dismissive comments doesn't help matters, and the stock was down -15% on this news. The story that the company has not had an operating profit in >10 years is not news to any investor who can read an earnings report.
My question is, simply, how did Forbes choose this particular company to write about, as there are many companies (of far larger market cap) out there who also have long corporate histories with much more 'juice' to write about. I would be curious to know how this company happened upon the Author's screen (as he doesn't note how he came to this story but rather just jumps right in).
With that setup, the company pushed forward its earnings date to Tuesday, and this morning announced the Sanofi contract. The press release is brief, but it does note that it runs to 2024- including $15m in milestones, with $5m expected in 2013. As per the Jefferies note that I saw out today, Sell Side is currently pricing in about 450mm units of Lovanox a year, with $0.70 per syringe, whichi s about >$100m a year in revenues once ramped up (could be a few years)
The contract is meant to silence some critics, but frankly I am not sure what is in the 'stock' at these levels and how much short selling (for which there is a fairly large base) vs. covering will play out over the next few weeks based on the push and pull. I don't know if earnings (either way) will silence either sides.
As such, it's important to take an objective look at the relative investment merits that in my view make this a compelling long term holding.
Until the recent spate of contracts (SNY, Biodel) the story on UNIS was a minimal revenue ramp ($1mm a quarter or less) company with a high cash burn (and only $8m in cash left after F3Q in May…including its $9.6m in net proceeds from the raise in February), with many partnerships "on the come". In UNIS' own words on its F3Q print, they have "turned the corner" and expect to "enter a period of hyper-growth". Through F3Q, Unilife had delivered on 2 of its 13 projected deals for 2013- but appears to be hitting its stride and the market cap of $150mm likely under-appreciates the ramp potential.
The Biodel Contract: A Major inflection point
In June, UNIS announced that it had inked a 15-year EZ-Mix contract with Biodel (that had previously been reported in April)- for a novel glucagon rescue drug for treating severe hypoglycemia. The product can likely rapidly penetrate the $125m US glucagon rescue market (based on IMS- and split between Novo and LLY…with 15% of high risk patients with an unexpired glucagon kit). I expect product launch in 2016, based on an IND filed by year end '14, and a pivotal trial starting by YE14, with 505b(2) in mid '15, and then 10 month approval process leading to launch in mid '16. Sensitivity for revenue for UNIS are roughly $10m per year, based on pricing at $10 per EZ-Mix. The contract is actually worth up to $100m+, based on $6m up front for EZ-Mix testing guaranteed, plus royalties of $30m+, and revenue potential of $70m+ over the 15 year contract period.
Background & Business Model
Unilife is a leading innovator of drug delivery solutions for the pharmaceutical industry. Its hallmark is a safety syringe technology that provides automatic activation of needle retraction with user-controlled rate of retraction. These features are compliant with OSHA regulations and preferred by healthcare workers. The most important product line is the Unifill® brand of syringes, which have glass barrels and are designed to be prefilled with injectable drugs by pharmaceutical manufacturers. The Unifill has a fixed needle for subcutaneous injections, while the Unifill Select® has interchangeable needles for intramuscular injections and the EZMix™ is designed for drugs that must be reconstituted just prior to use. The Company has also developed a targeted-organ delivery platform and disposable and reusable auto-injectors. These products, as well as others in the portfolio, will enable Unilife customers to differentiate their drugs in the marketplace, help healthcare providers meet safety regulations now in the United States and Europe, and improve patient compliance. Other factors that distinguish Unilife's products are their ease of use, size, cost-savings relative to existing safety syringes and vials, and patented technologies.
Cash burn is running at $35m a year, but will likely drop into '14 as syringe sales ramp up with the Biodel contract. Unilife also currently has an active $45 million at-the-market (ATM) facility with a current available remaining balance $41.2 million
Valuation and Risk/Reward
At current level, UNIS has a market cap of $340m with price of $3.55 and shares of 95mm. Institutions currently own 38% of the stock. Cash balance as of last quarter was about $6m. Revenues (quarterly) to date have been de minimus, at <$1m a quarter, but looking ahead to 2014 with the newly signed contracts, the ramp should proceed nicely with sell side estimates looking for about $35m in sales in '14 (still negative EPS though). I think the best approach is likely a forward P/S metric, as to get a real P/E multiple you'd have to look likely to 2016, which is a bit too far ahead for my tastes.
Judging by the growth profile and trajectory, as well as comps, when looking at MedTech companies with market caps of $50-500mm and annual sales of >$5m (using a Bloomberg terminal) you can pull up about 130 companies- with average multiples of 3.5x on forward sales. Some comps could be ATRS, PODD, WST for comparison purposes (Antares, Insulet, West Pharma). These companies have EV of $500m, $1.5b, and $800m respectively.
Notably, however, the forward P/S metrics here are 20x, 8x and 5x on forward, yielding a much higher average here.As such, I construct a bear/bull outlook based on this comparison set, leaving aside the cash value from the ATM facility on a per share basis. Thus my outlook on that $35m of sales in '14 would yield market caps of $175m (-50% from today's prices) to $700mm (+50% from today's prices).
However, when you adjust for the current contracts that have not been reflected in Consensus plus the pipeline that has not been announced, it is my view that the run rate could be closer to $50m, which yields a downside of $250m and an upside of $1b, or -30% vs. +300%, which is much more favorable.
Further, when you bake in the $100m run rate of Sanofi sales alone, clearly in the out years, upside could be more juicy.
I think the story is just beginning to play out but certainly for those with a longer term framework, the current controversy creates some nice entry points and certainly a trading position here.