Unilife Corporation (NASDAQ:UNIS)
F3Q11 Earnings Conference Call
May 16, 2011, 4:30 PM ET
Todd Fromer, Investor Relations
Alan Shortall, Chief Executive Officer
Richard Wieland, Executive Vice President and Chief Financial Officer
Thank you, Operator. Good afternoon everyone and good morning to our Australian supporters. Thank you for joining us for the Unilife Corporation fiscal 2011 third quarter conference call.
Before we begin today, I would like everyone to know that this conference call contains forward-looking statements. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. These forward-looking statements are based on management’s beliefs and assumptions and on information currently available to our management. Our management believes that these forward-looking statements are reasonable as and 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.
With nothing further, I would now like to turn the call over to Mr. Alan Shortall, Chief Executive Officer of Unilife Corporation. Alan, the floor is yours.
Thank you, Todd. Good day, everyone, and thank you for joining us for our fiscal 2011 third quarter conference call. Joining me on today’s call is our CFO, Richard Wieland.
The third quarter of fiscal 2011 marked a significant period for Unilife, as we initiated production of the Unifill® syringe. With this major milestone now completed, we are conducting final product validation procedures and expect to begin initial sales of the Unifill syringe to pharmaceutical companies in July 2011. There has been an exceptional response to-date from a host of the world’s top pharmaceutical and biotechnology companies for the Unifill syringe. We are very happy with the status of current discussions, and look forward to entering into agreements with a number of interested pharmaceutical companies over the coming months.
The Unifill syringe has been a great door opener to the top executives and decision makers at these pharmaceutical companies. A key reason for this is that before we came along, virtually everyone believed that integrating safety features into the primary drug container of a prefilled syringe was an impossible task.
Having now achieved the impossible with the commercialization of the Unifill syringe, Unilife has established the credibility and proven expertise to serve as a device innovation partner for pharmaceutical companies in other fast-growing and high-value sectors of the drug delivery device market.
Increasingly, top pharmaceutical companies are seeking access to highly innovative devices, such as Unifill, that can be customized to meet the specific needs of target biological drugs in their R&D pipeline. These companies are now seeking to work with us to develop additional device solutions that can satisfy their unmet drug delivery requirements.
It is expected that these pharmaceutical collaborations can replicate the success of the Unifill syringe on multiple fronts, and significantly expand the size and scope of Unilife as a global leader for device innovation.
It has taken a lot of hard work and perseverance to arrive at this position. In particular, it was imperative that the industrialization program for the Unifill syringe was completed ahead of schedule. To ensure Unilife was able to hit every single quarterly milestone since the program began in 2008, we initiated a surge in our staff and operational capabilities. As a result of this upfront investment, we have now arrived at the point where we can serve as a preferred and reliable supplier to pharmaceutical customers.
With the industrialization program now all but complete, we have been able to implement a timely realignment of our business. This realignment was designed to not only maximize commercial opportunities for the Unifill syringe, but also fast-track the commercialization of other innovative devices in our pipeline. As an additional side benefit, the realignment is expected to drive additional efficiencies in our business that should reduce our cash burn by approximately $12 million for the calendar year 2011 alone.
Finally, I am also pleased to announce that we have signed a term sheet with an equipment financing company to provide up to $12.0 million in financing for the initial assembly line for the Unifill syringe that is installed at our York facility. We expect to close this transaction by the end of May, allowing us to recoup $8.0 million in cash currently invested in this equipment. In combination with the savings from our recent realignment plan, we believe we now have sufficient cash to carry us through until at least the end of fiscal 2012.
I would now like to turn the call over to Rich to discuss our financial results for the quarter ended March 31, 2011….Rich…
As reported in our press release earlier today, our financial results for the third quarter of fiscal 2011 include revenues of $0.7 million compared to $2.4 million for the third quarter of fiscal 2010.
It is important to note that revenues from the industrialization program received during the quarter decreased by $1.2 million. As we have mentioned on our last couple of calls, the decrease in sanofi-aventis revenues was primarily due to an acceleration of the quarterly payments that occurred during the fiscal year 2009. Sanofi agreed to accelerate its milestone payments during 2009, in recognition of the industrialization program being well ahead of the original schedule where completion was targeted to occur at the end of 2011.We currently expect the 10th and final milestone billing of $1.4 million to be made in the quarter ended June 30, 2011 with the start of initial sales of the Unifill syringe. Also, we discontinued our contract manufacturing operations in December last year as we look to focus on the commercial production of our own products. This loss of revenues from contract manufacturing amounted to $0.5 million compared to the prior year quarter.
Total net loss for the three month period ended March 31, 2011 was $12.5 million, compared to a net loss of $(12.1) million for the same period in 2010.The increase in net loss is primarily attributable to the decrease in revenue as noted above, and increased selling, general and administrative expenses due to higher salaries and stock compensation costs. This is offset by a decrease in R&D costs due to a decrease in non-cash stock compensation costs relating to stock awards granted in the prior period to further strengthen the Company’s IP position. Excluding non-cash expenses, the adjusted net loss for the quarter was $9.3 million, or $0.15 per diluted share, compared to an adjusted net loss of $5.1 million, or $0.10 per diluted share, for the same period last year. These non-cash items for the quarter ended March 31, 2011 were $3.2 million, including the share-based compensation expense, depreciation, amortization and interest expense.
Turning to the Balance Sheet: As of March 31, 2011 the Company’s cash, cash equivalents and restricted cash was $30.2 million.
Also, as we disclosed in today’s quarterly press release, we recently signed a term sheet with a large equipment financing company for up to $12 million of equipment financing, which we expect to close by the end of May 2011.Under the terms of the agreement, we will utilize the proceeds from the financing for the Unifill automated assembly line that has already been developed by Mikron. We will confirm the completion of this transaction upon closing. However once the agreement is finalized, we project it will free up $8.0 million in cash that we have already invested in this equipment.
When combined with this $8 million in cash and the $12 million cost savings from our realignment program, we now expect to have sufficient cash to get us through until at least the end of fiscal 2012.
Alan, back to you…
Thank you, Rich.
Unifill Ready-to-Fill Syringe:
As I mentioned at the beginning of the call…..We began the initial production of the Unifill syringe at our manufacturing facility in York, Pennsylvania in March of 2011. We are currently in the process of conducting final product validation procedures for the syringe prior to its commercial launch.
We have received inquiries from some analysts and shareholders regarding what’s involved in the validation of the Unifill syringe. So let me just provide a quick explanation of these validation activities, as I believe it underlines just how much work is going on behind the scenes.
Prior to commencing the initial launch of the Unifill syringe, we must ensure its production conforms fully to the quality management system under which the product is manufactured. Our quality management system has been externally audited, and is fully-compliant with regulatory requirements. Because of the strength of our quality management system, and our compliance to its procedures during the validation of the Unifill syringe, we can commence the sale and marketing of the product without any regulatory approval that could potentially delay our go to market strategy. With that said, much progress has been made to date, including:
We have already validated all of the assembly equipment involved in the production of the Unifill syringe.
Final verification of the product design, including functionality testing of the device, is ongoing and should be completed by the end of May.
Validation of the sterilization cycle is ongoing and should be completed in the middle of June
The Development of all quality documentation for the Design History File is ongoing and will be completed by the end of June
Preparation of the Design Master File that will be lodged for the information of the FDA is ongoing, and should also be completed by the end of June.
We are making great headway with many pharmaceutical and biotechnology companies that have expressed interest in the product. Initial sales of the Unifill syringe to pharmaceutical companies will be used for a range of activities, including the start of two-year drug stability studies, validating the integration of the product into fill-finish lines, and market evaluations. Initial sales of the Unifill syringe during the second half of this year will be at relatively low volumes.
Given that it will take time to progressively build up the capacity of our Unifill production systems to near 100% efficiency, this fits in well with our ramp program. Furthermore, the average unit selling price for these initial small-volume batches will be far higher than what we are projecting for longer-term commercial quantities.
Let me be clear when I say that our primary goal for the Unifill syringe at present is to get as many drugs onto stability studies as possible. Pharmaceutical companies do not enter into stability studies lightly. It is fair to expect that drugs that go onto stability studies with the Unifill syringe will ultimately lead to the signing of long-term commercial supply agreements.
We expect that pharmaceutical companies should begin to sign long-term commercial supply agreements before they begin to build up their inventory of the product during 2012 in preparation for the commercial launch or relaunch of their drugs. It is possible that supply agreements may be signed earlier within therapeutic drug classes where several pharmaceutical companies are competing against each other, and one of them wants to obtain special marketing rights to the Unifill syringe.
We expect that the Unifill syringe can help optimize, or even extend, the lifecycles of many drugs to increase market share and maximize revenues for our pharmaceutical customers. Where the Unifill syringe can play a direct role in building or extending revenues for these drugs, there may also be some exciting opportunities for Unilife to receive long-term recurring royalties that would be over and above anything we received from commercial sales.
The credibility, expertise and operational capabilities we have established through the successful industrialization of the Unifill syringe puts us in an excellent position to expand into other high-value device areas where pharmaceutical companies have unmet needs.
In the letter that was recently sent to shareholders, our Chairman touched upon how pharmaceutical companies are concentrating much of their efforts on the development of a new generation of biological drugs.
Because these biological drugs are so complex and have large molecular compositions, they cannot be digested and typically need to be injected directly into the body. There are countless biologic drugs currently in development across a wide variety of therapeutic sectors. The global biologics market was valued at an estimated $149 billion in 2010, and is expected to reach $239 billion by 2015 at a compound annual growth rate of 9.9%. So it’s clear that the biologics sector is one of the hottest and fastest-growing sectors of the pharmaceutical market.
This represents a huge opportunity for Unilife’s growing range of injectable drug delivery devices. Many of these biological drugs will require a unique delivery device that is customized to address the specific requirements of the drug, and its effective administration to the patient.
A number of pharmaceutical companies are increasingly seeking to outsource the development of these customized drug delivery devices to industry specialists that can serve as a one-stop shop for device innovation.
Large, established medical device companies are in many ways ill-equipped to support the emerging drug requirements of pharmaceutical companies. Such established players specialize in manufacturing standardized commodity products. These products are then produced at high-volumes and marketed across a wide variety of parallel markets. That’s the standard business model for a large device manufacturer. Typically, if a pharmaceutical company comes to them with a problem, they will say ‘here is our product. Now go and fit your problem to our product.’
That’s not what pharmaceutical companies want. Particularly when it comes to this new wave of specialized biological drugs….And that’s where Unilife is in the prime position to help as a preferred partner for device innovation.
We have already validated through our relationship with sanofi-aventis what we can deliver when a pharmaceutical company comes to us with a specific challenge. As you have seen with the Unifill syringe, we are able to develop the perfect device solution that fully meets the needs of their drug, and its effective administration to the patient.
We now have the expertise to design, develop, manufacture and supply innovative and advanced drug delivery systems faster and more reliably than any large competitor.
Furthermore, our manufacturing facilities and operational capabilities are fully geared to meet stringent pharmaceutical expectations for high-quality, reliable drug delivery devices.
Our proprietary portfolio of products is now expanding rapidly to help accommodate the unmet needs of pharmaceutical companies for innovative, differentiated delivery devices. Indeed, the Unitract 1mL syringes and the Unifill prefilled syringes now being actively marketed by Unilife is just a small taste of things to come…
Some of the products in our pipeline have been previously disclosed, such as the Unitract 3mL syringe and the Unifill Select that feature attachable needles and are suitable for use with drugs and vaccines requiring intramuscular injection. For the Unifill brand in particular, we are also reviewing a number of other product variants that can each be customized to meet the specific needs of particular drugs and vaccines in the development pipeline. For the time being, these line extensions to the Unifill brand must remain confidential.
As a result of discussions with a number of pharmaceutical companies, we are currently working on a number of other advanced drug delivery systems. This includes other primary and secondary drug containers that will strongly complement the Unifill range of prefilled safety products.
Earlier, I mentioned that we recently initiated a scheduled business realignment that increased our operational focus towards Unifill sales, pharmaceutical marketing and new product development. This realignment took place at a key inflection point for Unilife, as we began to turn our primary focus from commercial production of the Unifill syringe onto its commercial sale to pharmaceutical customers plus the development of other products in our pipeline.
We have thus been able to eliminate a number of legacy positions that played an important role in the operational surge that fast-tracked the commercialization of the Unifill syringe, yet are now no longer required. We have also strengthened our frontline commercial team that is actively involved in the sales and marketing of our products to pharmaceutical companies.
Furthermore, we have also streamlined our organizational structure to drive speed, innovation and efficiency into all areas of our business. One key step has been to eliminate traditional silo-type departments such as engineering or product development that have traditionally governed the operation of a medical device company. Instead, we have replaced this structure with dynamic, cross-functional project teams that will drive all of our new device programs moving forward.
In short, there are multiple benefits arising out of this realignment. First of all, it is helping to further accelerate commercial discussions for the sale of the Unifill syringe with a number of interested pharmaceutical companies. Second, it is enabling us to replicate the successful model of pharmaceutical collaboration used for the Unifill syringe to fast-track the commercialization of several new devices in parallel. As a result, we can now begin to enter a number of other high-value and fast-growing markets for advanced drug delivery systems.
Third, it has streamlined our business to ensure we can serve as an agile, responsive partner to pharmaceutical companies that desire a one-stop shop for device innovation. And finally, as an added bonus, it has improved our operational efficiencies to such an extent that our cash flows for the 2011 calendar year are forecast to improve by $12 million. Combined with the capital equipment financing term sheet that we have now signed, this realignment puts us into a strong position where we have sufficient cash to fund operations until at least the end of fiscal 2012 exclusive of the anticipated sales of Unifill which will have been underway for almost a full year according to our estimates.
In summary, we believe that we are now poised to commence initial sales of the Unifill syringe in July 2011.Discussions with many pharmaceutical companies continue to accelerate. Indeed, the excitement around the Unifill syringe is now extending well beyond Unilife and into the headquarters of many of our target pharmaceutical customers.
In short, we are in the right place at the right time. The pharmaceutical market is rapidly transitioning to specialized biological drugs. Most of these complex drugs now in development will need to be injected into the patient. So they will require the types of innovative and customized drug delivery systems that we specialize in.
Furthermore, we have now built an enterprise that has the right balance between operational capabilities and entrepreneurial spirit. We can adapt and react far more quickly than our competitors to address the unmet needs of the pharmaceutical industry. And our facility, quality management systems and organizational structure are all designed to ensure these device solutions are not only developed quickly, but meet the stringent quality expectations of the pharmaceutical customer.
We are now poised to rapidly diversify our device activities well beyond safety syringes, and expand our commercial alliances with many of the world’s largest pharmaceutical companies.
Rich and I would like to thank everyone for joining us on our call today.
We are excited and encouraged about the continued success Unilife has had, and look forward to maintaining this trend, as we capitalize on the pharmaceutical convergence of therapeutic drugs with advanced medical devices.
Thank you for your support and we look forward to announcing further updates in the near future.
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