Amidst the recent flurry of posts on Unilife (UNIS), it appears a persistent theme on the short side, as evidenced by the Kerrisdale inflammatory title "Will Unilife Price its Potential Secondary Above $3.50", is the prospect that Unilife will do an equity offering, at a discount to current pricing, in a highly dilutive manner, due to their short fall of cash.
However, I believe that UNIS will not do a secondary equity offering for a variety of reasons. If UNIS does, however, the stock is likely to be weak (-10%+ from current levels). However, in the absence of that, I expect a strong rebound +25%+ from current levels simply as shorts cover their positions.
In fact, the recent Jefferies note which recounted the non-deal road show with management does address some of these issues. It is likely that shorts will continue to knock these positions, as distrust of management is a pernicious and savory short tactic, but nevertheless the facts bear repeating.
The Near-Term Balance Sheet Is Secure
- Known Deal Payments. Known deal payments upcoming include Hikma (HIK) for $25mm, and Sanofi (SNY) for $15mm within the next 3 quarters. Beyond that, Hikma will make additional milestone payments as part of its overall $40mm commitment.
- Future Deal Payments. As detailed in numerous recent articles and press releases, recently closed deals include Novartis (NVS), AstraZeneca (AZN), and MedImmune. Jefferies (JEF) estimated that milestone payments on wearable injector deals could be "sizeable" given the terms & size of the opportunity. The sell side is expecting development payments in the range of $5mm annually for each molecule, through a 2-3 year customization cycle, per drug.
- Debt Facility. The company can supplement its cash needs through its debt facilities, which provide up to $40mm in financing in two tranches. Notably, this would not be a dilutive equity offering as is feared, and would shore up the balance sheet if the milestone payments are delayed for whatever reason
The ATM Offering Is Not Being Tapped
Given the fact that UNIS has the option to tap into $40 million through debt facilities, an ATM offering is very unattractive for both the company (given the recent decline in share price), as well as for investors (due to dilution). As pointed out by commentators in previous short articles, thinking that the company is continuously stealth tapping its ATM belies a fundamental misunderstanding of how the Australian regulators work- the company would have to file a 6-k every time it uses this method, and since we have not seen filings, it implies it's not being used- plain and simple.
With either a combination of the expected milestone payments of $40m, and/or the debt tranche of $40m, this $40-80mm of additional cash generation in 2014 would give Unilife enough operating runway through 2016, assuming that it continues on its current burn rate and does not generate any additional income, at all.
Were UNIS more pessimistic about its cash generation potential, it would not continue to invest substantially in its R&D ($6.5m a quarter) and would likely prune SG&A, both of which have not declined in recent quarters.
The risk of a dilutive equity offering is lower than the market perceives due to the ability to tap the debt tranches if milestone payments are delayed. This overhang in the shares likely creates a buying opportunity as the fundamental thesis remains intact.