After several weeks of negotiations Unilife (NASDAQ:UNIS) finally managed to strike a widely anticipated deal with Amgen (NASDAQ:AMGN) that will provide the cash-strapped company with an immediate $50 mln in much needed liquidity.
I have already commented on the potential outcome of the negotiations in my article "Unilife Enters Exclusive Negotiations With Amgen- Revisiting My Bear Thesis" at the beginning of the year.
Frankly speaking I have been wrong when initially predicting the strategic review conducted by Morgan Stanley would most likely lead to a pre-packaged chapter 11 filing with the company's major creditor, Orbimed Advisors LLC ("Orbimed"), ending up with most of the company's assets including the intellectual property.
I also somewhat underestimated the potential proceeds from the strategic agreement in the works with Amgen as it has turned out now that Unilife has been able to buy itself roughly double the amount of time I acknowledged six weeks ago.
That being said let's get into the details of the agreement available so far:
- Amgen paid a $20 mln nonrefundable license fee in exchange for extensive exclusive and non-exclusive access to Unilife's entire product portfolio on top of the $15 mln payment already advanced to Unilife in connection with the entering into the exclusivity agreement on December 31, 2015.
- In addition Amgen has purchased $30 mln in newly issued 6% senior secured convertible notes due 2023 and may decide to purchase up to an additional $25 mln over the next two years ($15 million in January 2017 and $10 million in January 2018). The notes are convertible at any time at a price of 90% of the volume weighted average price during the 20 days preceding the conversion date subject to a floor price of $1.25.
- Unilife's major creditor, Orbimed, is deferring cash interest payments for a period of two years and instead will add the interest to the loan's principal amount. Also the minimum cash receipt covenant will be removed going forward. Furthermore Orbimed is waiving its right to receive certain royalty payments from the proceeds of the Amgen agreement. In exchange for this new set of major concessions Unilife will issue to Orbimed 16.74 mln warrants with an exercise price of $1.25 per share.
But the most interesting part might be one small sentence from the SEC-filing:
In addition, under the terms of the Eighth Amendment to the Credit Agreement, the Company will make, prior to March 30, 2016, such management changes as are requested by the Lender.
Obviously CEO's Alan Shortall's colorful tenure might come to an end pretty soon which after all might turn out to be a much better catalyst for the share price than the agreement discussed in this article.
But let's now look at the implications of the Amgen agreement:
Amgen's seemingly only "hard" commitment to the collaboration is the aggregate $35 mln in nonrefundable license fees which buy the company a far-reaching and partially exclusive access to Unilife's almost entire product portfolio. The majority of the collaboration value claimed by Unilife would come in the form of senior secured convertible debt, quite contrary to the intent originally stated in the exclusivity agreement for Amgen to purchase up to 19.9% of Unilife's common stock. At least the agreement allows for a satisfaction of the notes through discounted product pricing and credits against other future amounts potentially owed by Amgen.
In addition Unilife's disclosed in its latest 10-Q-filing:
As of February 5, 2016, the Company's cash balance was approximately $13.2 million, including restricted cash of $2.3 million. The Company believes its cash and restricted cash will provide the Company with sufficient liquidity to fund the Company's operations only to March 31, 2016. However, the Company may raise additional capital through other sources, including through the New Sales Agreement with Cantor Fitzgerald & Co and through the LPC Purchase Agreement. The Company is also pursuing the Strategic Process. If the Company is able to complete a strategic transaction, the Company expects to have sufficient liquidity to operate the business through at least 12 months from the date of the consolidated financial statements included in this report.
The company's cash balance on December 31, 2015 was roughly $20.4 mln so Unilife used $7.2 mln in cash during the first five weeks of 2016. Should the company continue to burn cash at a roughly $1.5 mln clip per week going forward the additional $50 mln in liquidity now received from Amgen would give the company leeway well into Q4/2016. Add some potential at-the-market stock sales under the recently established agreement with Cantor Fitzgerald & Co. and Unilife will most likely make it through the current calendar year until liquidity will be running low again.
Given that Unilife will have to pay a large amount of transaction fees to the consultants and law firms involved with the strategic review process I would actually expect the company's cash balance to move down somewhat faster than projected above but the company will most likely be able to make good for this by further utilizing its financing agreements with Cantor Fitzgerald and Lincoln Park Capital Fund.
Lastly as expected the agreement does not provide for any material near- or medium term revenue contributions given the fact that since 2013 Unilife has signed several similar agreements with some of the industry's leading companies like for example Sanofi (NYSE:SNY), Hikma (OTC:HKMPF), Medimmune, a unit of AstraZeneca (NYSE:AZN) and Novartis (NYSE:NVS). None of these agreements has so far produced material revenues for Unilife despite most of them having been in place for well over two years now. So don't expect any material revenue contributions from this new collaboration either until perhaps 2019 at the earliest date.
So in the end Amgen invested a mere $35 million in order to get (even partially exclusive) access to virtually the company's entire product portfolio and furthermore committed to some senior secured convertible notes financing with the collateral governing the new debt securing Amgen's ongoing access to Unilife's targeted technology even in case of bankruptcy. Similarly to previous agreements Unilife expects to generate future revenues from the new Amgen collaboration but the potential amount as well as the timeline remains unclear at this point.
Given that the agreement with Amgen was the result of a costly and protracted strategic review conducted by Morgan Stanley the outcome looks highly disappointing. Unilife sold exclusive access rights to wearable injectors within select drug classes and non-exclusive rights to most of Unilife's other proprietary delivery systems for a rather small amount and furthermore added even more debt to its balance sheet.
From a cash flow perspective the deal is likely going to carry Unilife through 2016 but does absolutely nothing to address the structural challenges of the company as any material product sales to Amgen would be years in the future - quite similar to previous agreements signed with other industry leaders in the past.
So what kind of rabbit should investors expect Unilife (potentially new) management to pull out of their hats at the end of 2016 when cash will be running low once again ? If a thoroughly executed strategic review process only brings in $35 mln in cash and some new debt financing what else would the company have to offer to prospective new investors or customers ? Remember that virtually all of the company's assets and intellectual property have already been mortgaged to its creditors and after the Amgen deal there's not much in potential exclusivity agreements left in the pipeline.
So expect more creative financing efforts going forward as Unilife's next severe cash shortage is already looming at the end of the current calendar year. Unfortunately the company will have not much left to offer anymore at that time.
A costly and protracted strategic review process thoroughly conducted by Morgan Stanley only bought Unilife a roughly ten month lifeline while at the same time adding even more debt to the company's already weak balance sheet with no material short- or medium term revenue contribution expected from the new Amgen collaboration. With most of the company's product portfolio and intellectual property now being already mortgaged to senior creditors Unilife will run into major difficulties to raise the cash needed to keep the company going after 2016.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.
Additional disclosure: As a daytrader I have actively traded the company's shares on several occasions in the past and might decide to do so in the future.