Unilife Corp's (UNIS) CEO Alan Shortall on Q3 2014 Results - Earnings Call Transcript

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Unilife Corp (NASDAQ:UNIS)

Q3 2014 Earnings Conference Call

May 12, 2014 04:30 pm ET


Todd Fromer - KCSA Strategic Communications

Alan Shortall - Chairman of the Board, Chief Executive Officer

Ramin Mojdehbakhsh - President, Chief Operating Officer

Dennis Pyers - Interim CFO, Vice-President and Controller


Haris Khaliqi - Foster Stockbroking

Keith Markey - Griffin Securities

Danielle Antalffy - Leerink Partners

Anthony Petrone - Jefferies

Jeffrey Cohen - Ladenburg Thalmann

Jeremy Feffer - Cantor Fitzgerald


Good day, ladies and gentlemen. Welcome to the Unilife Corporation Third Quarter Fiscal 2014 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Todd Fromer, Managing Partner of KCSA Strategic Communication. Please go ahead.

Todd Fromer

Thank you. Good afternoon, everyone, and good morning to our Australian supporters. Thank you for joining us for the Unilife Corporation fiscal 2014 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 information currently available to our management.

Our management believes that these forward-looking statements are reasonable as of 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 file with the Securities and Exchange Commission.

During this call, we may also present certain non-GAAP financial measures such as adjusted net loss and ratio that use these measures in our press release with the financial tables issued earlier today which is located on our website at unilife.com you will find our definition of these non-GAAP measures or a reconciliation of these non-GAAP financial measures with [GAAP] measures GAAP measures and a discussion about why we think these non-GAAP measures are relevant. These financial measures are included for the benefit of the investors and should be considered in addition to and not instead of GAAP measures.

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

Alan Shortall

Thank you, Todd. Good afternoon and good morning to those dialing in from Australia. I am joined on this call today by Unilife's President and Chief Operating Officer, Dr. Ramin Mojdehbakhsh, and Interim CFO Dennis Pyers. This has been another strong quarter for Unilife, where we continue to execute on existing and new customer agreements, and this continues to be a strong financial year for the company.

In the first nine months, we have generated cash receipts of $22.6 million, $10.9 million was received during the third fiscal quarter. We also continue to grow our revenue and narrow our loss while increasing our investment in R&D and operations.

We have strengthened our cash position by securing debt financing from one of the most reputable healthcare investors in the world. Our sources of revenues are increasing in line with our growing base of customers. We have a clear pathway to profitability based only on the supply agreements we have secured to-date.

Our business model continues to differentiate us from traditional medtech companies as our supply agreements can be valued as annuities, due to their recurring revenue and long-term nature, and we continue to scale up our manufacturing as customization activities begin to transition into commercial product sales during the first and second quarters of fiscal year 2015.

Before we go over the results of the quarter, and for the benefit of investors that maybe new to our story, I want to quickly emphasize a few timely points regarding our market opportunity. We participate in the global market for injectable drug delivery systems, which generates over $12.5 billion in revenue annually and is growing at a compound annual growth rate of over 11%. This does not include new market segments such as wearable injectors and ocular delivery systems that are experiencing higher rates of growth and are poised to generate significant revenue.

Our focus is to capitalize on the largest, fastest-growing and most profitable segments of the market, for our products and expertise can be uniquely effective in addressing unmet or emerging needs. We will participate only in those segments where we can provide game-changing technologies that are differentiated from the competition and can generate significant value for Unilife and its customers.

The investment that we make in R&D is aligned with unmet customer needs and guided by the abundant discussions we had with them. As a result of this customer-centric focus towards R&D, we have prospective customers lined up in advance for our pipeline products. We are now beginning to see the early results of this targeted investment in R&D as we increase our base of customers as well as our based on revenue.

In established market segments such as prefilled syringes, we offer a broad range of differentiated platform technologies that provide many benefits over the competition. In new market segments, such as wearable injectors drug reconstitution, ocular delivery and smart reusable auto-injectors, we are establishing a leadership position.

With the global market for wearable injectors alone expected to generate annual revenue of more than $8 billion within a decade, the value of such a leadership position becomes very significant. We offer pharmaceutical companies a full array of injectable drug delivery systems that can satisfy virtually older pipeline and lifecycle management needs. We can also execute on behalf of customers with speed and flexibility.

Our business model is diversified in multiple ways. We participate in six key market segments that together address the needs of virtually all injectable therapeutic categories outside of insulin. We believe the insulin delivery market is well served. As a result, we choose not to participate in this category. We have attracted a solid base of small and large customers. Close, long-term relationships are being built with each of these and other prospective pharmaceutical customers.

As the differentiated features of our devices become a part of the regulatory label for the drug device combination, customers are motivated to enter into long-term agreements that ensure continuity of supply for 10 years or more. We have supply agreements in place that last as long as 15 years. Our business model is therefore much like an annuity, in which each supply agreement is long-term with recurring annual revenue and intrinsic growth year-over-year.

Furthermore, adding each new customer not only increase our revenue, but also increases the rate of revenue growth. However, unlike a traditional medtech company that can have substantial sales and marketing costs, our business-to-business model allows us to have minimal selling cost resulting in more attractive operating margins. Our business is also backed by a strong and growing intellectual property portfolio that has created barrier for new competition and in some cases may extend the commercial lifecycles of the drugs that they are approved to deliver.

I am often asked about our commercial pipeline and when the next deal is coming. While it is true that we have a large growing commercial pipeline with a string of additional agreements in process, I would like to make one thing clear. Unilife is a successful business with a clear pathway to profitability based on existing supply agreement alone.

We will now provide an update on new and existing contracts and how we continue to scale up our manufacturing to support the schedules of our customers. We now have 10 customer programs that are generating cash receipts and that number is growing. We have provided information about some of these customers and programs such as Sanofi, Novartis, MedImmune and Hikma.

Several other revenue-generating customer programs are also ongoing that we are not disclosing publicly at this stage for commercial and competitive reasons. Information about some or all of these programs will be disclosed in the future as appropriate. The revenue, revenue growth and operating profits that we expect to generate from these customers are very attractive.

Now, I'd like to hand the call over to Ramin to provide some more detail.

Ramin Mojdehbakhsh

Thank you, Alan. We continued to build out our operational infrastructure in order to support upcoming customer demand for commercial products. We have completed a reconfiguration of our manufacturing clean room space to accommodate new assembly lines that are on order.

We also continued the construction to finish additional manufacturing clean room space for additional manufacturing lines on order. I will start with an update on our Unifill platform. We have grown the Unifill platform to include several device families that can together meet the needs of all prefilled biologics, drugs and vaccines.

We have executed multiple long-term supply agreements that will position us to be one of the major suppliers of prefilled syringes. After initial ramp programs of a few years in length, these first few supply agreements will give us to supplying a few hundred millions of Unifill syringes annually.

Over the full term of these existing Unifill contracts, we expect they will generate cumulative future revenue in excess of $1 billion. These supply agreements speak to the annuity-like model that Alan spoke of earlier. We had one Unifill line in place with an annual production capacity of 60 million units. Much of this capacity has been sold or reserved for existing customers.

Traditional assembly lines are on order to manufacture other products within our Unifill platform. Various components for these additional lines are being received and installed. As each of these new lines is installed, work will continue towards production and supply.

In the first quarter of FY'15, we will start commercial sales of one product from our Unifill platform from the existing line. Commercial sales of two additional Unifill products will commence in the second quarter of FY'15 from two other lines. Commercial sales of these three separate Unifill products will accelerate through the remainder of FY'15 and beyond in line with customer ramp schedules.

We also continue to scale up manufacturing capacities for other products outside of Unifill. We are ordering or have ordered additional assembly lines and equipment for some of these products to support current and upcoming supply requirements from our customers.

We are mindful of the way we spend capital and we are prudent about the timing of when we order new equipments. Everything is done around planned ramp programs that are in place with each customer. We anticipate the increase in our capital expenditure on a quarter-to-quarter basis will be smooth and gradual. This reflects the well-planned investments that we make to enhance our operations capabilities.

Alan, back to you.

Alan Shortall

Thank you, Ramin. As new customer programs come online, it has been a key component of our financing strategy to enter into a debt financing with a reputable healthcare investor that would be free of warrants and would generate long-term value. This process involved multiple interested parties and took several months to secure the right terms with the right investor.

I believe the $60 million agreement that we signed with OrbiMed in March, was a great outcome. It demonstrated our ability to raise debt capital without dilution with the largest healthcare dedicated investor in the world. $40 million has been received by Unilife to-date. We also have the option of receiving two additional tranches of $10 million in December 2014 and June 2015, provided we remain in compliance with the terms of the agreement. It is up to us as to whether or not we take them.

This structure gives us control over the process and can help to minimize future interest payments. Based on current calculations with an interest rate of 10.25% interest only payments under the OrbiMed debt financing will be approximately $1 million per quarter. This represents cash flow savings of approximately $400,000 per quarter compared to the debt service payments that were being made prior to OrbiMed.

Let me repeat that. This consolidation of debt financing will reduce our repayments by $400,000 per quarter and we get $40 million in funding. This represents a smart deal for Unilife and its shareholders. Unilife can elect to repay the loan in part or in full at any time prior to the maturity date in 2020. The royalty payment is capped and we have the option of buying it out at a reduced amount at any time.

We believe that this debt financing provides us with the necessary capital to drive business growth as we bring several large contracts with existing customers through to commercial rollout. The strategic value of our relationship with OrbiMed extends beyond this debt facility. In particular, having OrbiMed as a long-term investor is helping us to consolidate and enhance our relationships with some of our pharmaceutical customers.

I would now like to move into discussion about our cash receipts, revenue and revenue growth.

Although we have discussed recognized revenue in the past, I am being asked more questions about cash receipts. I agree that cash receipts can reflect a more meaningful picture of our business at the current stage.

From my perspective of running the business, I attach greater importance to the cash that we collect from customers as it provides us with the capital to fund our business operations. Total cash receipts from customers for the current quarter were $10.9 million, an increase of $10.8 million compared to the same quarter in fiscal year 2013.

Total cash receipts from customers for the fiscal year-to-date nine months, which ended on 31 March, 2014, were $22.6 million, an increase of $21.5 million compared to the same period in fiscal year 2013. Obviously, this is a nice trend that I would like to continue and it further enhances our cash position.

The significant increase of our cash receipts since the beginning of the fiscal year also tells the story of us having turned the corner as I have said on previous calls. Another positive trend that shows how our investments in R&D are beginning to payoff can be seen in the improvement in our overall net operating cash flow. This has improved significantly as R&D investment begins to translate into customization program payment and upfront fees associated with long-term supply contracts.

Total net operating cash outflow relating to operating activities for the current quarter was $2 million compared to a cash flow outflow of $10.2 million for the same period last year. This represents a reduction of $8.2 million or 80%. While there may be some fluctuation in cash receipts on a quarter-by-quarter basis, I expect this recent narrowing of cash outflow would continue as we head towards profitability.

It's also important to note that cash flows relating to headcount, research and development and interest payments for the current quarter were stable compared to the second fiscal quarter of 2014. We will continue to be prudent in controlling our expense growth.

As I said earlier, we are now generating cash receipts from 10 ongoing customer programs. Much of these cash receipts relate to our customization of devices for customers. The resulting customized devices are intended to be used by customers with target drugs on a long-term commercial basis. A customization phase typically transitions into the commercial supply phase in a period of between one and three years.

When brought together, the cash generated from all of these customization programs can be meaningful. Of the 10 customer programs that are now underway and generating ongoing cash receipts, I can advise that several relate to our platform of wearable injectors.

Unilife has entered into customization and commercial supply relationship with MedImmune, the biologics arm of AstraZeneca for our wearable injector technology. We have several other wearable injector programs that are underway or in negotiations with other pharmaceutical customers.

We are generating cash receipts from some of these wearable injector customers for long-term customization and supply relationships are formalized. I believe that the inherent value of our wearable injector platform is not reflected in our current valuation.

I would also like to highlight one of our other products. That is Ocu-ject, which is designed to accurately and precisely deliver small doses measured in microliters into the eye. As per previous statements, we have begun to generate cash receipts, first Ocu-ject contract as we commenced a customization program for a customer and his target therapy.

Details regarding this customer and program must remain confidential at this time. Other pharmaceutical companies that are active in ophthalmology sector are also pursuing our Ocu-ject technology, which stands alone in its class.

I would now like to turn the call over to our Interim CFO, Dennis Pyers, to speak to our recognized revenue.

Before I do however, I'd like to give Dennis at proper introduction. Dennis has 30 years of financial experience, including 25 years as a partner and auditor at KPMG. Before taking on the job of Interim CFO, he was our VP, Chief Accounting Officer and Controller, for four years.

Dennis is well versed across all areas of our business and is doing an outstanding job as Interim CFO. He has the full confidence of the board and our management team. Having Dennis as an integral part of our leadership team for so long made it a simple and straightforward decision when I initiated this strategy to appoint a new CFO, 12 months ago.

With such a strong person in the Interim role and our strong business position, we can afford to take our time in the appointment of a permanent CFO that will complement of future growth needs.

I believe the recent appointment of John Ryan as our Senior Vice President and General Counsel and Secretary, reflects the caliber of executives we desire and we are attracting to our team. I would like to take this opportunity to welcome John to our team.

With that, I will turn the call over to Dennis.

Dennis Pyers

Thank you, Alan. Revenue for the third quarter of fiscal year 2014 was $1.4 million compared to $0.7 million for the same period in 2013. It is important to note that $2.7 million in revenue, which was anticipated to be recognized during the current quarter has instead already been recognized in the fourth quarter of fiscal year 2014, based on the timing of the receipt of certain documentation. This $2.7 million will be incremental to the anticipated revenue recognized for the fourth quarter of fiscal year 2014.

Revenue for the nine months ended March 31, 2014 was $8.1 million compared to $2.1 million for the same period in 2013. Deferred revenue increased by $8.3 million to a total of $18.4 million as of March 31, 2014.

Our operating expenses for the quarter were up $1.5 million or 10.6% compared to the same quarter in fiscal year 2013. This reflects an increase in R&D investment as we continue to deliver on our customer programs.

As we continue to invest in R&D and manufacturing, we are also reducing our SG&A. This was down $0.6 million or 8% compared to the same quarter in fiscal year 2013. We have a small increase in interest expense for the current quarter compared to the same period last year, which reflects the OrbiMed debt financing.

The company's net loss for the three months ended March 31, 2014 was $15.1 million or $0.15 per share compared to a net loss of $14.1 million or $0.17 per share for the same period in 2013.

Adjusted net loss for the three months ended March 31, 2014 was $11.7 million or $0.12 per share compared to $9.4 million or $0.12 per share for the same in fiscal year 2013. This increase is primarily attributable to increased investments in R&D. Adjusted net loss excludes non-cash share-based compensation expense, depreciation and amortization and interest expense.

For the nine months ended March 31, 2014, the adjusted net loss was $27.1 million or $0.28 per share compared to $28.2 million or $0.36 per share in the prior period. Unilife reported $39.7 million of total cash and cash equivalents, including restricted cash as of March 31, 2014.

Alan, back to you.

Alan Shortall

Thank you, Dennis. We expect to continue reporting sequential quarter-over-quarter growth and significant year-on-year growth moving forward. We expect that full-year revenue for financial year 2014 will end up in the range of $12 million $15 million.

We expected that revenue for financial year 2015 will be significantly higher than 2014 fiscal year, but it's still a little way too early to talk about providing guidance for next fiscal year. We will continue to review this over coming quarters to try and help provide you with greater clarity on our future growth.

We anticipate cash receipts will continue to outpace our recognized revenue for some time. However, this will gradually changed as commercial sales begin to comprise a greater share of revenue and as revenue that has been deferred is recognized.

Through financial year 2014, virtually all the revenue we have received or recognized is based on milestones, development and customization fees.

We will begin to recognize revenue based on commercial sales of products in financial year 2015. This recognition of commercial product sales will be in addition to the revenue we generated from other customization programs that are in the process of transitioning to commercial supply.

We anticipate that commercial sales will increasingly become a larger proportion of our total revenues in financial year 2015 and beyond as more customization activities transition into commercial sales. We expect to continue our rapid growth in financial year 2016 as we grow commercial sales and generate additional development and customization revenue from new programs.

Before we turn the call over to questions, I would like to say that we remain focused on executing our business plan and growing our business. We have strengthened our cash position via the OrbiMed deal as well as payments from 10 ongoing customer programs.

Much of this cash from customers is being generated by customization of a number of products in anticipation of commercial supply. Several of these programs are for wearable injectors. Programs are now underway across all six of our product platforms.

From the start of financial year 2015, we begin to look forward to commercial sales from a range of products. As we continue to strengthen our cash position, we are reducing our losses by continuing to invest in R&D and expand operations in response to customers' demands.

I look forward to a strong finish for financial year 2014 and continued success through financial year 2015, as we ramp up commercial sales and expand relationships with existing and new customers.

I would now like to open the call to questions. Operator?

Question-and-Answer Session


Thank you. (Operator Instructions) Our first question comes from the line of Haris Khaliqi Foster. Your line is open.

Haris Khaliqi -Foster Stockbroking

Hi, Alan. Haris Khaliqi from Foster Stockbroking.

Alan Shortall

Hi. Thanks Harris. Good to talk to you.

Haris Khaliqi - Foster Stockbroking

Thanks for taking the question. I just got a couple of questions regarding manufacturing production capacity. Could you provide some color on the size of the new lines currently being installed and how should we be thinking about I guess the installed capacity by the end FY'15?

Alan Shortall

Thank you, Harris. I'll let Ramin actually take that question.

Ramin Mojdehbakhsh

Sure. Hi, Harris. I can answer that from a number of different perspectives. First of all, we had a number of different the product lines and each of them have different capacity requirements in the near-term and through 2015. Well, just to aggregate then I would just give you an approximation overall across a number of different product lines, we anticipate having production capacity of roughly a few hundred million units in the 2015-2016 timeframe. This is spread across. The Unifill product platforms and we mentioned there are three of them, three distinct products on that platform that we are going to be commercially selling in the FY 2015.

Other products such as wearable injectors and keep in mind again that the ASPs for these products are vastly different, so it's bit of an apples and oranges, but in terms of capacity as I said in aggregate you can think of a few hundred million units in the timeframe of 2015-2016 as planned for meeting the current demand forecasts of our existing customers.

Haris Khaliqi - Foster Stockbroking

Okay. I mean, how should we be we thinking of capital expenditures for FY'15?

Ramin Mojdehbakhsh

Sure. Our capital expenditure is increasing and that's obviously fully expected. I am going to give you some overall general order of magnitude. In FY 2014, we will finish the year roughly around, and these are very rough numbers, twice as much as FY 2013. We will double that roughly in 2015 and that sort of sets the trend until it begins to taper off and flatten in terms of growth in the 2016-2017 timeframe.

Consistent with what Alan has stated in the past, which is roughly it would level off around the $20 million or around there for the foreseeable future beyond year 2016-2017 timeframe.

Haris Khaliqi - Foster Stockbroking

Just one more question for me. The capital expenditure, I mean, is that forecast to be funded by equipment financing or will that be funded from the existing augmented [price]?

Ramin Mojdehbakhsh

It's really a combination of three different sources and this is something that we have discussed before. Certainly, with the cash our balance sheet, that's one of the sources. A major source of that is going to be the cash receipt is the cash receipts from the customer and as you see we are setting a nice trend, in that we anticipate to continue that trend and there's also the financing that's also available to us from various sources.

It's really the combination of those three and we make that call at any given time based on the most favorable combination of sources that we would consider at that time.

Haris Khaliqi - Foster Stockbroking

Okay. Ramin and Alan, thanks for taking my call.

Alan Shortall

Alan Shortall

Thank you, Harris. Appreciate it.


Our next question comes from the line of Keith Markey with Griffin Securities. Your line is open.

Keith Markey - Griffin Securities

Hi. Thank you for taking my questions. I was just wondering you talked a little bit about having many of the customization programs taking one to three years to reach the commercial phase. Is it reasonable for us to think that most of the deferred revenue is related to that and as a result what would be the approximate amortization period for the revenue you got deferred on your balance sheet at this point?

Alan Shortall

Sure, Keith. Each program is different and the recognition of the deferred revenue depends on milestones and amortization schedules that are specific to that program, so I can't answer that question in general, but yes the cash receipts that we are generating and nicely so, most of that cash is considered deferred revenue.

Of course from a cash perspective, it's very important to us, because that certainly helps our cash position and allows us to finance our operations going forward, but in terms of recognizing that revenue much of that is deferred and is recognized for each program specifically based on milestones and amortization schedules that we had designed around those specific programs.

I should also mention that, yes, the one, two, three-year period is really a rough estimate. This was really in order to try to bring some clarity as to how some of these programs go through the customization phase and graduate to commercial supply phase and each program has a different timing.

Just to give a very specific example, the three programs that we mentioned earlier regarding three distinct Unifill products they are on the lower end of that customization time period. As we mentioned, they are going into commercial supply in the next two quarters, so that's a great example of programs that have now graduated through a customization program. In these cases, a shorter customization program and now are coming to fruition for commercial sales in the next two quarters.

Keith Markey - Griffin Securities

Okay. Thank you. I was just wondering, you talked about a number of we wearable injector deals and I assume (Inaudible) customization level of interaction at this point, how many companies are actually involved with that product line?

Alan Shortall

At this stage, Keith, we haven't given detail on that. We have said that we are involved in several programs. We believe that we are actually in a very strong position. As you know, it's a whole new sector and for delivering large - those volumes for biologics.

We actually are involved and as I said several programs and indications from the market are that we are leading and taking a leading position in that market space and watch the space as we go forward. We are very confident in our position in that.

Keith Markey - Griffin Securities

Okay. Thanks. Then one last question, what was the average number of common shares outstanding used for calculating the total net figure?

Dennis Pyers

Yes, Keith. It's Dennis. Roughly $100 million. If you use a $100 million for the quarter, that would be sufficient.

Keith Markey - Griffin Securities

All right. Thank you.

Alan Shortall

Thank you, Keith.


Our next question comes from the line of Danielle Antalffy with Leerink Partners. Your line is open.

Danielle Antalffy - Leerink Partners

Thanks so much. Thanks guys for taking the question. Alan or maybe Ramin, if someone, if you could give us some color on the $2.7 million that you noted was pushed into Q4 adjusting back to the last quarterly earnings call, you guys were had talked about sequential revenue growth from there, which was $2.6 million, so if you had recognized that $2.7 million this quarter that would have been the key. Just wondering is that related to, so number one, why did it get pushed out? Number is it related to Hikma in building commercial supply ahead of a launch.

Secondarily start on Hikma in fiscal '15 commercial sales, what's the sort of tipping point or what's the catalyst that starts to drive commercial sales? Are we waiting for an approval of something or waiting for you guys to integrate the drug with the Unifill syringe? A little more color on what the catalyst is that we are waiting before we start to see commercial sales would be great.

Alan Shortall

I will take the first part of the question, I'll let Ramin take the second part. First of all, the $2.7 million has been now recognized in the fourth quarter of the financial year and the reason why it wasn't recognized in the quarter reporting now pure a technicality with the receipt of the document I'm not going to refer to, what customer otherwise.

It was very simple just a technique issue relating to the date of the document and we don't see it as being a major issue from that perspective. It is already being - we have recognized in the extra quarter and will be incremental on what we expected to recognizing in that quarter.

Just had nothing to do with the delay any program or otherwise it was just literally a receipt of the document that was which we expected to have in that quarter report we are reporting.

Ramin, maybe in terms of what's the driver, I think the second part of question, what's the driver for product sales.

Ramin Mojdehbakhsh

Sure. Yes. Hi, Danielle. All the guesses that you had were actually very logical guesses. I'm sure that those guesses are true at some point in time with various customers. In these particular cases, this has entirely to do with the readiness of the customer in bringing these devices on board and filling them and so forth.

Customers go through a significant amount of effort and expense capital investments to build the filling equipment and in the cases of Unifill devices for those customers who don't have any filling capability and those who have filling capability, it's a much simpler task but it still is onerous for them to have the line to be with change parts to validate them and so forth and get them ready to fill new syringes,

The customers go through this process diligently. It takes some time and effort and it's a significant investment on their part depending on how much they need to do at any given time. Once they are ready to take supply. We start supplying it to them. Of course, we plan and time our own capital of expenditures and build up the capacity exactly timed to exactly what the customers would take equipment again to be very prudent before capital. We don't want to build capacity and let it sit, we time it exactly to when the customer needs to take delivery.

In these three cases that we just mentioned today, this has to do with a customer readiness to take the products to fill them and then to go through the process that they need to do to get approval and then move on with selling the device drug combination.

Danielle Antalffy - Leerink Partners

Okay. That's helpful. Then I guess just a follow-up on that. What gives you the comfort level that Hikma is that point of readiness or really near that point of readiness with a one drug that you expect to begin commercial sales in Fiscal '15?

Alan Shortall

Well, I didn't really mention anything specifically Hikma did not identify the customers that was talking about. I can answer that question for you in general terms not a day goes by that with these customers that we have that were that close to commercial supply. We don't spend hours and hours across different teams in different reasons whether it's planning or whether it's reviews or whether it's working with third-party vendors to help them with making plans and taking delivery and installing equipment and solving technical issues and so forth, we are intimately involved.

We actually work off of what we call an integrated product plan with each of these customers and I'm happy to say that we have a very, very close working relationship with them, so that's the level of confidence that we have.

All part of the program, we moved into our program, we participate in it with them and we manage with them the critical path of this integration, so that's my generic answer and I would say that those are pretty much the case for each of these customers that we are describing.

Ramin Mojdehbakhsh

I just want to add to it if I can, Danielle. That level of integration of project teams and planning is often put in place before we even sign the supply agreement, so that that is when we can talk a bit of the confidence in supply agreements that are coming. We are at that stage of that timing planning and the allocation of resources by the pharmaceutical company and our own resources for those project teams to ensure that team has transition to right into supply.

Danielle Antalffy - Leerink Partners

Okay. Great. That's helpful. Thanks.

Alan Shortall

Thank you, Danielle.


Our next question comes from the line of Anthony Petrone with Jefferies. Your line is open.

Anthony Petrone - Jefferies

Thanks, everyone, and good afternoon. Maybe just two focusing on just the cadence of milestones from Hikma, maybe if you could provide an update on where that particular deal fits and what you would expect in fiscal 2015 as it relates to milestone payments from Hikma.

Alan Shortall

Thank you, Anthony. Ramin, I'll let you answer that one.

Ramin Mojdehbakhsh

Sure. Anthony, I general, I can tell you that the program is going very well. With Hikma, we had been told by Hikma executives that they are very pleased with the progress of the program in our contribution to the overall war everything according to plan. In fact I would say that we anticipate to further accelerate even the programming from areas as we walk through the activities with Hikma.

I can't really give you specific comments about the timing of the milestones in the event. I'll leave that to Hikma. I don't want to disclose any information that may be central to Hikma, so if you don't mind I'll refrain from that, but I will tell you overall that things are on track and working very well and we anticipate to bring to help Hikma bring a number of these drugs to market as soon as they are ready.

Anthony Petrone - Jefferies

Okay. Then maybe a follow-up would be looking beyond some of the deals that are in place today that we are aware of, so we have Hikma, Sanofi, MedImmune and Novartis. Can you give us a sense of how the pipeline looks today and sort of as we look in the fiscal '15, the cadence of deals that you are expecting throughout the year and if indeed those would come with upfront milestones.

Alan Shortall

I think you will find a very good cross-section as part of deals that we have delivered over the last six to nine months. The range of products now we have, the diversity of our business, you'll see very diverse types of deals with upfront payments sign-on fees, customization fees, as we go forward. It is difficult to actually pinpoint. I'd love to be able to actually drop a deal every month or every two weeks. Unfortunately just doesn't happen like that.

Some of these deals that were in negotiation with are significant deals. If you look at the cumulative revenue, I mean, typically we were talking earlier on the call about the unit volumes. For a biologic, a high-volume use of units per molecule would be 5 million units per annum sake. You know at the averaging pricing of between $20 and $35 each, it gives you a quantum of the kind of revenue that they can generate. Also, when you started looking that main forming part of the regulatory process for drug device combination, it will be between very significant deals and strategically very important for our pharmaceutical customers, so I'm not [concerned] about the deals that we have in the pipeline. We have got a significant number of them and they could drop at anytime, literally at any time. We are very close to a number of them, but we are not pushing any higher than would be expected by our customers and we are working on four as we said during the prepared remarks.

We are working on four that's already generating cash income, which we haven't actually announced publicly, so they are actually underway and we in very good shape. I am more confident than ever before the shape we are in.

Anthony Petrone - Jefferies

Great. Then maybe just a last one for me and I will hop back in, an update on capacity expansion. The financing in place for more than that you any milestones that you would be looking at as it relates to 2015 and in capital expenditures and building capacity, thanks again.

Alan Shortall

I am not sure I quite understand the question.

Anthony Petrone - Jefferies

In terms of adding capacity to your existing capacity in terms of adding the capacity to manufacture more units on an annual basis, where is your current capacity as we sit here today in terms of units and do you expect to increase that in 2015, now that you have the financing from OrbiMed?

Ramin Mojdehbakhsh

Sure. Currently, in terms of the prefilled syringes, we have 60 million units annually installed capacity. As I said earlier on the call, we are building that capacity. We have a number of different lines on order. We reconfigured existing manufacturing clean room space to take the lines as they come in and install them appropriately.

In fact, we have already begun doing that outside of the clean rooms as various components of these equipment arrived. We are also finishing additional clean room space in the black space that we had. This was space that we had reserved for expansion. It was built out.

If you've been to our headquarters facility, you would have seen it. It's a very, very large space that we had planned for expansion, so we are currently in the process of construction for adding additional space there, so right off the top of my head, I can count, three or four additional lines that are on order in various stages of receiving the various components of the equipment and being installed.

When you look at that in aggregate, as I have mentioned earlier, in terms of the capacity we would be looking at roughly a few hundred million units in the 2015-2016 timeframe. This is across all the different products. Again, I just want to mention that we are not just talking about a simple prefilled syringe capacity. We are really looking across all the different six product platforms that we have.

In terms of the capital expense that you asked, we expect to finish out this year and these are very rough numbers, at about twice what we finished out last year. In FY'15, we anticipate to double the amount of the 2014 again, and we would continue in that ramp until we leveled off at roughly just under $20 million a year in the 2016-2017 timeframe for some time.

Anthony Petrone - Jefferies

Thank you.


Our next question comes from the line of Jeffrey Cohen of Ladenburg Thalmann. Your line is open.

Jeffrey Cohen - Ladenburg Thalmann

Hi, gentlemen. Thank you for taking the questions and thank you for the commentary thus far.

Alan Shortall


Jeffrey Cohen - Ladenburg Thalmann

Could you specify, you talked before about the second line that you were building out, would that also be for Unifills or did you not say specifically what that would before for?

Alan Shortall

Sure. The second and third lines that I mentioned earlier are specifically for products from the Unifill platform, so they are not the original Unifill, but there are additional Unifill platform devices.

Jeffrey Cohen - Ladenburg Thalmann

Okay. Got it. That's helpful. When will you be filing your quarterly financials expected tomorrow?

Dennis Pyers

They are filed now. They are filed at close of business today.

Jeffrey Cohen - Ladenburg Thalmann

Okay. Were there any other new products or any new R&D projects that you would like to speak about?

Alan Shortall

Plenty. There is not enough time. Those activities are ongoing and proliferating. The customers are seeking us out as a source of innovation and literally I have to say every month, if not every week, we see some challenges out there and these are unmet needs and we have had really the great fortune of building very quickly this reputation where the customers can really come and talk to us about what they need and they don't consider that sort of an unthinkable thing which might have been the case previously in our industry.

We are very happy to say that the kinds of discussions that we have and become unmet needs that we uncover through the discussions, are things that that we can address and we can address uniquely and rapidly, so we have a number of programs like that ongoing and you would see some very, very innovative products down the road from us.

I would say that one of the areas that we are expanding quite a bit in, and again, really informed by an and driven by very advanced customers is more and more smart devices, smart delivery devices either disposable or reusable. That's one area that we are seeing tremendous amount of demand in so we are very happy to participate.

You are not going to see those disclosed for another maybe 6 to 12 months as we go through these programs and provide various functional prototypes to customers, but I think you would be delighted to see the kind of capability that these devices will have for very advanced products.

Jeffrey Cohen - Ladenburg Thalmann

Okay. Thanks. One more if I may for, Dennis, as far as the line items on reporting, so it sounds like you are going to have a second line item for product sales and other? Could we envision a second and/or a third line item, much like you used to report back in '10 and '11 and '12 or should we just anticipate two?

Dennis Pyers

Likely the two. I think our convention is to report revenue in aggregate and then comment from there in terms of the makeup of that revenue on a quarterly basis.

Jeffrey Cohen - Ladenburg Thalmann

Okay. I am sorry for lying, one more if I may. Why was SG&A zero for the quarter? Would there have been something? - I am sorry. Cost of goods. Why was that zero?

Dennis Pyers

For now, any units that are being delivered or under the customization programs, so we were reporting those cots as part of R&D. Commercial product sales will have cost of sales attached to it, but products that are part of customization programs are considered R&D for our reporting.

Alan Shortall

We are happy to say that in the next couple of quarters, you are going to begin to see commercial sales. As a result, you are going to begin to see cost of goods sold. Over time, Jeff, we would see commercial sales as becoming an increasingly larger portion of our revenue. As they grow very rapidly despite the fact that we will continue to have in fact even have growing customization and development fees and other fees attached with programs, we anticipate that our commercial sales will grow even more rapidly so you will see that that becomes a bigger portion of the revenue and the cost of goods sold become more representative of the commercial products that we are selling.

Jeffrey Cohen - Ladenburg Thalmann

All right. Perfect. Okay. Thanks for taking the questions guys.

Alan Shortall

Thanks, Jeff. Appreciate it. Thank you.


(Operator Instructions) Our next question comes from the line of Jeremy Feffer with Cantor Fitzgerald. Your line is open.

Jeremy Feffer - Cantor Fitzgerald

Good evening, guys. Thanks for taking my questions. Most have been answered. Just a couple, first, I wanted to come back to Ocu-ject. I think, Alan, you mentioned it briefly and remember when you announced that deal late last year, didn't provide much disclosure both for competitive reasons and for confidentiality.

I am wondering if you can provide any color at least on the progression of that deal and again without - I know you are limited in what you can disclose, can you provide any color on conversations with other players in that product market?

Alan Shortall

Yes. Thanks. Good to talk to you. That deal is progressing extremely well. The feedback from the customer is excellent. Again, it's as Ramin was saying earlier, any of these projects require usually significant resource application by the pharmaceutical customers and ourselves and fully interaction of project teams.

The feedback is that that project is going very well. We are extremely excited about Ocu-ject and this is an enormous financial opportunity for pharmaceutical companies and there are some key players in this area creating a biologics treatment for treatment of the eye and it is projected to be I think $5 billion to $8 billion market annually in next four years.

At the moment for delivery to the eye is really the eye is an enclosed organ with liquid inside, so the introduction of the dose is very, very important and it's typically microliters and 10 microliters, 15 microliters, 20 microliters, 40 microliters, which are like teardrops.

At the moment, the only way to administer those doses to the eye is they are typically using a 1 milliliter tuberculin syringe. That's like using a sledgehammer when a feather should be used, but the reason our technology to deliver more accurately and at the moment in the current delivery system they are using, they are getting a 22% plus or minus variation. That actually causes issues in terms of compliance with the label and the regulatory approvals, but there is no technologies that currently deliver any more accurately than that. The Ocu-ject will.

We actually, with the Ocu-ject, delivery 2% variation, not 2% plus or minus, 2% variation. That's a massive improvement from a 22% plus or minus, so we believe that device is actually going to become the standard and we are extremely excited about as I said and we are in interaction with many pharmas in that space which indicates to us that our opinions is going to be become a standard is real one.

Jeremy Feffer - Cantor Fitzgerald

Do you have a sense in very general terms when you think you might be able to provide some more disclosures about what you have already announced and what you may be able to announce in the future?

Alan Shortall

Yes. Ramin - to add to what I have said, so I'll actually allow.

Ramin Mojdehbakhsh

Sure. In terms of disclosure, we can't really predict right now. In fact the other ones that we can disclose to you before the particular deal that you are talking about. Each customer is different, their needs are different and the level of confidentiality and frankly the strategic import all disclosure might be different.

Clearly, always a competent fact that we feel very obligated obviously that these deals become material as they cross our threshold we will find a way to disclose them appropriately to the market.

I should just expand a little bit more on what Alan was saying, as you mentioned other programs in the space. Again, we really have the fortune and the privilege of having many customers reach out and discussed unmet needs and an Ocu-ject is one of those areas that that frankly not unique, because we have been having these conversations across all the different categories that we participate.

With respect to Ocu-ject, we have been quite busy with number of global customers as the unmet needs have emerged. I can just tell you more generally that we have a number of variations around Ocu-ject to meet very special needs.

Some of them have to do with the design of the transport mechanism as in this case, the needle and the sharpness of the needle sometimes. It has to do with the various types of needle that need to be attached to the device at the time of the application.

For applications in which we are needing the Ocu-ject with micro catheters to deliver into specific parts of the eye and/or cases in which we are mixing various drugs to be used in Ocu-ject in very novel ways in which again fundamentally it is still from a physicians perspective it is the same as operating a syringe exactly the way they do today so we're not changing the practice of medicine. We are just essentially meeting or addressing their unmet need still in the same form of delivery of our drug through a syringe, so very, very active in that space.

We anticipated that there is a lot of unmet needs in this space and why we went into the space I can tell you that I am even more pleasantly surprised about how much unmet need that there that the very that we did not necessarily anticipated this quickly to show up and so we have been very, very active in this space. Again, we anticipate that we are going to announce some of these programs in the near future the timing of it, I can't really promise.

Some of them maybe even before we disclose further details about the deal that we have already announced.

Jeremy Feffer - Cantor Fitzgerald

Okay. Then one last one for me. Just quickly, I think, just little bigger picture. As you speak to more of these pharma companies for the different portfolio products, are you encountering any pushback from a competitive standpoint? Are there any competitors in the field that are trying to battle with you or create competitive products that some pharma companies are forced to take notice of? May be just provide a little color on the competitive landscape.

Alan Shortall

Sure, Jeremy. No problem. Look, the market is very diverse and segmented for injectable drug delivery systems. Sure, there is a lot of large competitors that actually have injectable dose delivery systems, but they are commodity devices. There is no company that we know of that has such a diverse portfolio of significantly differentiated devices. This is the value we bring to the table, where the differentiation and the benefits and provides the end-user our pharmaceuticals customers can leverage that to, A, either the market share, protect the market share on increased by revenues market share from their competitors and that's the value we bring to the table.

Again, with the diversity of our portfolio it will vary from product-to-product. You look at wearable injectors. I mean, that's the market space that is being predicted will be generating over $8.5 billion in revenue in 10 years time. Now, people want to be in that marketplace, so there's a number of competitors there.

We believe we actually are in the lead position in that market space what the pharmaceutical customers are telling us. We have actually resourced a very strong team of 33 of the best engineers in the world like into injectable pumps. The feedback we are getting is that our ability to execute in a technical capability is better than anybody else's, so that's one area that I think very confident you are going to take a lead position.

When you look at other products across the board, we actually have our auto injectors and our smart auto injector, the LISA, it's the only an electronic auto injectors available in the marketplace. I am sure this will try to catch up, but at this stage were not seeing any individual companies that are outperforming as our innovative is.

We are out innovating everybody that we can see. Certainly, the large competitors in the marketplace typically they don't innovate, because their focus is on the Street's expectations of their earnings for the next quarter.

Consequently, they don't resource the project team. They try to do everything on the shoestring, so what do they do is stay with the status quo. That gives us a great opportunity to use our innovation capabilities through actually locked-down long-term supply wins with our pharmaceutical customers and we are in a very strong position.

Ramin, do you have anything to add to that?

Ramin Mojdehbakhsh

Sure. Just to add to that, there are some categories in which competitors choose not to participate. In fact, sometimes we hear from our customers that when they reached out to various in fact traditionally we feel like we are rather new to the scene the companies that have been around for a long time and customers have reached out to those companies, those companies have been reluctant to step forward the unmet need.

Let me be very clear. We have very good competitors and we are very, very respectful of their capabilities and their offerings and the technologies and every company has a lot of different types of strengths and we appreciate all about competitors, but I can say that it's amazing how smart our customers are.

When we work with them just every day, when we come across these customers, and these are usually teams of people who do their due diligence and really create these programs and these are very complex programs that they put together and we are just really amazed at how capable these customers are, how these teens are and how well resourced these teams are?

Frankly how single-minded they are about what it is that they want and they are very clear about it. This is a big change in our industry that I've noticed over the last 10 years where customers have been asserted themselves and they have developed a lot of capabilities internally to know exactly what they want in fact demanded. This is one of the reasons that we get a lot of traction in the space, because we actually listen to what they want and we try to do exactly what they want.

Because our customers are very particular about their needs and they are very clear about their needs, they make very clear choices and we have been very fortunate that when they make those selections, we found being favor by many customers for many of these reasons that that Alan mentioned. Part of it is also, as Alan said, the speed with which we can respond to these needs.

Jeremy Feffer - Cantor Fitzgerald

Okay. Thank you very much. It's very helpful. I appreciate the color.

Alan Shortall

Thanks Jeremy. Appreciate it. Good to talk to you.


I am not showing any further questions at this time. I would like to turn the call back over to management for closing remarks.

Alan Shortall

Thank you very much and much appreciated. Thank you for joining us on the call today. Thank you.


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

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