Unilife (UNIS) is a very unique, early stage health care device manufacturer developing products to try and grow itself into a much larger company by 2015. Will it succeed in the effort? Is the common stock a good value at the current stock price of $3.70 per share?
Existing State of the Business
Unilife Corporation is a developer, manufacturer, and supplier of drug delivery systems. The main customers for it's products are pharmaceutical and biotechnology companies which want unique devices to deliver and further differentiate complex drugs and vaccines. Other buyers include medical equipment suppliers of health care facilities and distributors of self-administered prescriptive medication.
Unilife reported financial results for the quarter ended December 31, 2011 on 2/9/2011. UNIS had a GAAP loss of ($0.19) per share, ($12,850) on revenues of $900K. On an adjusted GAAP basis, net loss was ($0.14) per share ($9,569). For the 6 months ended 12/31/2011, GAAP net loss was ($0.35) per share ($22,555) on $ 3 million of revenue and the adjusted GAAP loss for the same 6 month period was ($0.25) per share or ($16,098).
Highlights of the most recent quarter included:
- A completed secondary stock offering of 8.25 million shares which raised $33.8 million for the company in November of 2011.
- Signed a clinical development agreement supplying devices for targeted organ delivery in the spring of 2012
Unilife has $39.3 million of unrestricted cash on the balance sheet and $30.9 million of total debt, $5.276 million of which is short term. Since the company became a public corporation in the United States, it has amassed an accumulated loss of $142.8 million. The losses are typical of a company developing new products and trying to break into an existing market or prepare for growth of a new market.
In the most recent 10-Q filing on 2/9/2011, the company believes current cash is enough to sustain operations through the third quarter of fiscal 2013. Based on the current cash burn of nearly 10 million dollars per quarter, using adjusted GAAP figures, 2012 will be a critical year to build revenues and begin dramatically reducing operating losses.
Why would any investor put capital into an enterprise which has lost nearly $150 million since it became a public company? The markets it is trying to penetrate are massive:
- existing drug delivery market of syringes
- pre-filled syringes
- self-injection devices
According to a company presentation at the UBS Global Life Sciences Conference on Sepember 19, 2011, by 2015 those three markets will grow between 50% from 2010-2015 ($10.25 Billion to $15.8 Billion).
Ok, so the company has large target markets, but there are also changes in the existing market that could help make it's ambitions a reality. Biologics are large molecule drugs and currently make up about 10% of all drugs on the pharmaceutical market. By 2015, it is projected they will comprise 20% of all marketable drugs. There are currently more than 1,000 large molecule drugs in the development pipeline at drug companies all over the world. Almost all biologics require an injection, and many are expensive drugs requiring specific formulation and delivery requirements.
Pharmaceutical companies and biotechnology companies are looking for ways to differentiate their drugs from competition in all areas: existing patent protected drugs, generics, and biosimilar drugs. Many large pharmaceutical companies have drugs coming off patent in the next five years, and if they have a unique delivery device, it is maybe possible to extend the product life for a few years. A unique delivery device packaged with a drug coming off patent might be a very good strategy to employ for all of the large pharmaceutical players facing patent expirations.
The self-injection market (pdf) is also set to grow rapidly in the next few years. Reduced costs, a smaller administrative burden for hospitals, and better quality of life are all reasons for the possible expansion.
Unilife Product Portfolio and Competitive Advantages
Unilife has a product portfolio consisting of:
- Prefilled syringes with integrated safety features
- Hypodermic syringes with integrated safety features
- Autoinfustion systems
- Drug Constitution Delivery Systems
- Devices to Target Organ Delivery
The products Unilife sells are:
Each product is at a different stage of its commercial life. The Unifill syringe was contracted by Sanofi (SNY). Sanofi has the exclusive right to purchase Unifill prefilled syringes, and it paid $36.4 million for those rights, $13 million up front in a one-time fee and in 2009, UNIS recognized $2.5 million and deferred $10.6 million of the payments. In the 6 month period ended 12/31/2011, Unilife received and recognized as revenue the final 1 million Euro payment. Sanofi has the exclusive right for purchase of Unifill therapeutic drug classes of anti-thrombotic agents, vaccines, and 4 confidential sub classes until 6/30/2014. Unilife is able to negotiate with other pharmaceutical companies to use Unifill syringes with drugs targeted for use in therapeutic drug classes outside of those of Sanofi's with some restrictions.
In March of 2010, Unilife signed an exclusive 5 year agreement with Stason Pharmaceuticals to market the Unitract 1ML syringe in Japan, China, and Taiwan. Stason is required to buy a minimum of 1 million units of the syringe per year during the terms of the contract, subject to regulatory approval in those markets, which is currently pending. Unilife has made progress entering into new distribution channels as well, as seen by this contract with a large health care alliance.
With 66 million shares outstanding and a current stock price of 3.81, the market capitalization of UNIS is a little more than $250 million. With current revenue at less than $10 million and operating losses averaging a run rate of 40 million per year, a buyer is buying the potential of the product portfolio growing sales from the existing level to greater than 100 million per year and beyond. 2012 is a critical year for sales growth to materialize. Let's look at the operations of Becton, Dickinson, and Company (BDX), one of the largest supplier of syringes and needles in the world, and UNIS to get a better idea of what UNIS needs to generate in sales to grow into and possibly exceed the current stock price. BDX has almost $8 billion of sales and operating margins of almost 22%. If we approximate the UNIS operating margin at 20%, UNIS will need $100 million of sales to generate $20 million of operating profit. With the current valuation at $250 million and operating profits of 20 million, a buyer would be paying 12.5 times operating cash flow for the stock.
Other Developments and Considerations
The management of UNIS is heavily comprised of former members from Becton, Dickinson, and company. The obvious consideration is management has a long history of relationships with many pharmaceutical and biotech companies which they hope to use to grow sales.
Founder of Unilife
Dr. Ramin Mojdeh
BD (Head of Pharma Systems and Product Development)
Cytochroma, Advanced Life Sci
Dr. Jack Kelley
VP, Strategic Marketing
VP Commercial Development
Dr. Masoud Samandi
VP, R&D BD
Finally, the company receives payments in euros and holds Australian dollars as a portion of cash and cash equivalents, so it is exposed to some currency risk, which is currently not hedged using forward contracts or options.
Decision Time: Buy, Sell, or Hold
Personally, I find UNIS to be a very promising company, and 2012 will prove to be critical to see a large increase in sales growth and narrowing operating losses. My own view is if you have a long time horizon and are willing to speculate a bit, this might be a company to consider. I certainly would be more apt to look closer if the stock pulled back and sales volumes show marked improvement.
Disclosure: I am long BDX.