After a huge short attack on Unilife (NASDAQ:UNIS), it looks like the naysayer's have finally been proven wrong. The company secured a $60 million in total debt financing with a very prestigious and well known investment management company called OrbiMed Advisors.
After speaking with a financial industry veteran who is familiar with debt financings, I learned that debt financings require an intensive vetting process that requires thorough validation of patent portfolios, financial statements, physical property, and intrinsic valuation. While I was uncertain about the strength of IP protection on the Unilife product line before the announcement of this debt financing, I am now a lot more comfortable. Like stated earlier, OrbiMed Advisors is a large and respected investment management company with the resources to hire the best IP lawyers and auditors. If they are comfortable committing $60 million to Unilife, the IP protection should be virtually airtight.
This debt financing should be considered a big victory for us UNIS shareholders, because it means that the company won't need to raise money through share dilution. From what I gathered over the last few months, this share dilution argument was one of the biggest staples of the bearish case for Unilife. And now that the argument is gone, UNIS is up 12% (at time of writing) to $4.85 per share.
This is a really big blow to the short sellers - most of which are deep underwater at this point. As of February 28th 2014, about 21.5 million shares of UNIS were short, when the stock was trading at $4.63 per share. From the short history of UNIS, it seems that many of the positions were initiated when UNIS was trading below $3.00 per share - implying that they will need to cover soon.
The year ahead looks pretty good for Unilife from a financial standpoint because of the potential to become an earnings positive company by the end of the year. In particular I'm looking for drastic increases in revenues from the Hikma deal (for Unifill prefilled syringes), the additional contract with Sanofi, and from upfront payments from supply contracts that have yet to be announced for the Precision-Therapy wearable injector and for the ocular injection platform Ocu-Ject. There is significant unmet need for cheaper wearable injectors, and ophthalmology is going through a growth spurt that makes Ocu-Ject a very attractive vehicle for novel drugs being developed for wet AMD, diabetic macular edema, conjunctivitis, and other prominent eye conditions.
Unilife should have something like $50 million in cash right now given the $40 million upfront from OrbiMed and recent milestone payments from pharmaceutical partners. Based on the company's operating budget in 2013, this gives the company enough cash to last until the end of 2014 without considering any additional milestone payments.
So in conclusion, I restate my thesis that Unilife will go earnings positive before the end of the year from a combination of Hikma income and from milestone payments. Unilife is positioned to become the largest provider of prefilled syringes in the world, and the most recent debt deal validates the idea that both their IP protection and business model solid. Competition from the largest player in the syringe space, Becton Dickinson (NYSE:BDX), does not seem to be a real issue for Unilife either - although short sellers certainly wish it was at this point.
Disclosure: I am long UNIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.