Recently there has been a lot of interest in the drug delivery company Unilife (UNIS) - a stock I have followed for some time. While it has been a long wait for good news, it appears that my patience is finally starting to pay off. This year, Unilife announced new deals with Sanofi (SNY), Hikma (OTCPK:HKMPY), and Novartis (NVS). The stock looks ready to close the year at double the valuation relative to the beginning of the year, if not higher.
One thing that makes this stock particularly interesting right now is the high short interest, which is about 20% of float. After the recent 60% rally in UNIS, I imagine that most of these short positions are deep underwater. This presents an opportunity for a huge short squeeze in coming months as short sellers begin to lose even more money just on margin interest.
Last week, an overly bearish article was published on Unilife that contained a number of factual errors and outright misinterpretations of the company's story. These also seem to imply that the large pharmaceutical companies [Sanofi, Novartis, AstraZeneca (AZN), Hikma, etc.] working with Unilife have not done their due diligence on the company or its product line.
Since the company is probably one of the most misunderstood names in the healthcare space, this article will address some of the most irrational and false arguments being made against the company right now. The following arguments, which are italicized and quoted, come from last week's article.
"The company needs to succeed with either Sanofi or Hikma. However, given Unilife's track record with announced supply agreements, there is a good chance that both deals will fall through."
This claim suggests that the recently announced contracts with Sanofi and Hikma are necessary for the success of the company, which is misleading. These contracts are for the improved prefilled syringes - only one out of six main products that Unilife has developed. It is also unlikely that these contracts will fall through - especially the one with Sanofi. Unilife has been working with Sanofi since 2003. Sanofi has also invested a total of $50 million up to this point in the deal with Unilife, and has now committed to a supply contract that extends all the way to 2024. The only "suggestions" being made about the failure of the Sanofi/Hikma contracts are being made by those that are shorting the stock.
"The company's deals with the other pharma companies have little revenue or profit potential, since they are targeting small, niche markets."
This might be the most inaccurate claim being made. The wearable injector that Unilife is developing is arguably their most promising product in the long run, and it is at the forefront of a new drug delivery market that is estimated to be >$8 billion by 2022 according to Roots Analysis. This is for the devices, alone. Including the drugs would probably bring the figure into the hundreds of billions range.
The wearable injector is also being jointly developed with AstraZeneca's subsidiary MedImmune for large molecule delivery. Based on sales volume in the millions for each of these molecules, and an estimated $30 per device, I think it'd be reasonable to say that each new customer for these types of devices would bring in at least $400 M in revenues to Unilife. The company also expects to have large scale production at operating margins of 40%, which adds a huge amount of potential value to the MedImmune deal alone.
"The drug is what's important, not the injector... the marketability of a drug delivery device is all about how the drug that's inside it... The injector that's used to inject the drug isn't as important. When you order your favorite meal at a restaurant, is it a big deal what kind of plate or fork and knife you use?"
This isn't true at all for drug-device combination products, which are tested in clinical trials as combined products. They are also sold together as combined products, which is why the FDA would not want anything to change after a drug-device product is approved based on previously collected data. Unilife's delivery devices offer a high level of differentiation, and the manner in which the FDA approves drug-device products also protects Unilife from larger competitors.
"Prefilled syringes usually sell for about $0.40 apiece. The manufacturers need to have very efficient production lines in order to make a profit on those syringes because they are sold so cheap. Auto-injectors are also very cheap. Drug companies pay only about $5 apiece for them. The auto-injector market currently is only about $300 million, and Becton Dickinson (BD) controls the vast majority of that market. Wearable injectors (also called the "patch") have been around for over 10 years and are sold for $5-$10 apiece."
In each of these cases, the author implies that Unilife would only be able to sell prefilled syringes, auto-injectors, and wearable injectors at prices comparable to the ones mentioned above. However; there is little discussion over the premium pricing that is justified on Unilife devices due to the actual improvements that are made with them.
The prefilled syringes have a safety clip feature built into them, which significantly reduces the chance of being exposed to a dirty needle. Regular prefilled syringes with the safety clip are sold for ~2x the price, and Unilife sells them at this approximate price level.
The company's auto-injectors are significantly more sophisticated than those currently on the market. They add new injection speed/depth features and compatibility with drugs with higher viscosities, plus a number of other features that are explained in the company's presentation material. They offer enough to justify a much larger premium, and they are successfully sold for $200 apiece.
Lastly, the author mentions the existence of wearable injectors. He may be referring to insulin pumps, which are sold for much more than $5-10 (think hundreds of dollars) and are much more difficult for patients to use. I believe that this is a prime example of a lack of understanding of the differences between devices like insulin pumps and the wearable injectors being developed by Unilife.
"It's the hospital and the insurance company who make the decision, primarily the insurance company. And since the insurance company is the payer in the US, the insurance company will almost always take the cheapest one. Insurance companies don't care so much about safety, like with Unilife's retractable syringe. They only care about making the highest profits."
This is a simplistic argument that does not take into account US and EU laws that mandate the use of safety products selected by healthcare workers.
"Unilife has not been able to secure a commercial supply agreement with its retractable syringes. It thought it had one in 2011 with Sanofi."
The author neglected to read this press release from September 9th, which announced the close of a 10-year supply contract with Sanofi for the Unifill syringes. This statement also ignores the deal with Hikma.
"Unilife's supply agreement with Hikma could also fall through, and my research suggests Sanofi will never have a commercial supply agreement with Unilife."
Since there is no specific "research" included with this big claim, there is no way to determine how the author came up with this conclusion. However; we can once again go back to the 10-year agreement and commentary made by both companies. None of it suggests that Sanofi will suddenly back out of the agreement and take unnecessary penalties in doing so.
"If Unilife's retractable needle technology ends up used by biotech companies, it is something that the top drug device makers like Becton Dickinson and Covidien can compete against if they have to. They are not stupid and would react if they deem that it's a threat."
This argument doesn't even factor in the existence of patent protection.
"It cost Sanofi just $5 million for the exclusivity agreement with Unilife. $5 million is a very small amount for Sanofi to pay for exclusivity, and is immaterial to the company. It doesn't give any indication that Sanofi will follow up with a supply deal."
The actual figure is $45 million to date, and the company is expecting another substantial investment in the future. This is a substantial amount to invest, considering that a number of small and promising pharmaceutical companies could be bought for that kind of money.
"A big risk for a drug company to invest in a Unilife brand syringe is that it is only one supplier. If a drug is a big moneymaker for the company, they almost always have more than one supplier, usually two. Having at least two suppliers is very important."
This claim suggests that large pharmaceutical companies that have signed on with Unilife don't factor in the various types of risk involved before making a decision.
"Another case of risk is looking at Unilife's auto-injector. For Unilife's auto-injector, Unilife's own syringe must be used. That makes the pharma company even more dependent on Unilife as it decreases its flexibility. The drug company will not only have to buy Unilife's auto-injector, but also its syringe."
This is actually good news for the pharmaceutical company, since Unilife syringes would be filled with the pharma's own drug instead of that of a competing company's. This gives both companies more revenue in the long run, and mimics the razor-razorblade model. This "con" is actually one of the biggest pros of the auto-injector.
"With the risks and costs associated with Hikma's deal with Unilife, it could fall through like some of Unilife's previous deals..."
This claim is followed by the suggestion that Hikma management doesn't really understand the Unilife device and the implications of their supply contract. I think that the #2 injectable drug company in the United States, with a worth of over $2.3 billion, can afford specialists that understand the technology and its implications on Hikma's product line. The author has a tendency of calling Unilife's partner companies stupid, and its competitors smart.
"Novartis is testing an orphan drug in these trials. Novartis went to Unilife because it isn't worth other device makers' time to produce this device. An orphan drug is for a disease that affects less than 200,000 people in the United States. So if Unilife creates only 200,000 devices, how much profit would that be? And that is if the drug ends up getting approved, which won't be for another couple years. Novartis has already paid Unilife several million dollars for the development of this device. We don't know what kind of cap that would put on Unilife's profit on the device, since they haven't revealed the details of the Novartis contract."
The Novartis deal is very secretive, although it has been revealed that the drug-device product is designed to be a non-invasive alternative to a surgical procedure for a particular orphan indication. Unilife was able to provide a price estimate for their product, which is north of $100 apiece. This provides revenues of up to $20 million per year in the US alone, for a product that Novartis will put through trials. While the device does not have the explosive potential of the wearable injector or the auto-injector, it's fair to say that it could generate a very nice stream of income for Unilife in a few years.
"In November, Unilife struck a deal with Medimmune to sell its wearable injectors (aka the patch). Wearable injectors are for situations where patients need to be injected with a high volume of the drug. From 2ml to 4ml. Syringes are designed to only inject 1ml or 2 ml. The wearable injectors allow Medimmune to sell more of its drug at once since higher volume is required. While this arrangement can be good for the biotech company, it isn't that great for the medtech company. For the medtech company, unit sales are much lower with the patch than with syringes."
These lower sales figures are corrected for with the higher pricing of wearable injectors. Unilife will charge between $20-30 for each of these, which is significantly more than the cost of a prefilled syringe.
"Vetter has had a reconstitution device on the market for 20 years called the Lyo-ject. It is currently the best reconstitution device on the market."
This claim attacks the utility of EZMix, although it does not account for the simple fact that Lyo-ject is not ventless, and that it leaks if not held properly. It is an unsafe injector that has very limited potential since it breaks sterility prior to injection.
I think it can be hard to understand exactly why Unilife's product line is different from and better than products that already exist on the market. However; I think it takes effort to ignore the contracts that Unilife has been closing in recent months with much larger healthcare companies. I think we can assume that these pharmaceutical companies have much more data and knowledge to work with. We should also consider that Unilife's own COO was the former head of R&D at Becton Dickinson, and that he knows what he's doing when it comes to product design.
Sure - Unilife is risky, but the market for delivery devices has huge potential. This company has the potential to make a very big impact on industry, which could translate into very high revenues and earnings numbers if you factor in their estimated 40% operating margin.